Sometimes the tail wags the dog. That seems to be the case with the payments Goliath MasterCard (MA), which has started taking mobile payments cues from relative pipsqueaks, like PaidPiper, a six-month-old San Francisco outfit with all of 10 employees. Specifically, MasterCard, with 6,700 workers, is looking to PaidPiper to design mobile payments software tools for developers.

"We started to help [MasterCard] prioritize what we need from a commercialization perspective," says Atif Hussein, PaidPiper's founder.

"We represent the startup world, so if we want" certain features, "I'm sure big companies and small companies want them," he says.

In this type of relationship, MasterCard is "effectively supplying the plumbing that allows [Hussein] to go off and build a house," says Dave Butler, the product manager for MasterCard's Open API. "We have no idea what that house or dwelling is going to look like."

Many other companies, including large rivals like Visa and PayPal, are similarly courting small developers with application programming interfaces, or APIs.

"It's a really exciting space that we're just beginning to put our toe in and feel the temperature of the water," Butler says. "It's actually quite warm. There's a lot of interest in this."

PaidPiper is using MasterCard's network as the foundation for a mobile payment system that lets users request funds from another source for specific purchases. With a smartphone, the user takes a photo of the desired item and sends it to the person or organization that might pay for it.

This app can be used by a teenager requesting money to buy a video game system or an employee requesting money to cover a business expense. When the funds are delivered, PaidPiper's app generates a single-use card number that is limited to a specific merchant and dollar amount.

For this system to work, PaidPiper needed to allow some flexibility in how funds are spent once the user receives them. To this end, PaidPiper persuaded MasterCard to fast-track the addition of a merchant ID feature, which allows PaidPiper's app to restrict spending to a specific vendor, such as Wal-Mart, without restricting it to a specific location if that merchant owns a chain.

MasterCard was "a lot more open to working with startups like us" than its rivals were, Hussein says.

Visa (NYSE:V) does not make "the technology I needed available to people like me," he says. "They may have it and they may be running it, but … it's not in the consumable API route that I needed." PayPal is more open, but it is so new to the point of sale that it lacks the breadth that Hussein says he needs to develop his products.

"Visa has the lion's share of the market at this point still, so they might not be focusing on this area quite as much," says Julie Conroy McNelley, a research director at Aite Group. As for PayPal, it has been most successful in mobile and online, "which is their bread and butter," she says.

PayPal, a unit of eBay (EBAY), is working to quickly close the gap at the point of sale. It also enjoyed a head start on the card networks, says Zil Bareisis, a senior analyst for the research firm Celent.

"PayPal led the way, and the other two networks rapidly followed," he says. Any startups that find the payment networks difficult to work with can instead work with companies that "package up chunks of functionality and create access to networks in a controlled way," he says.

MasterCard has been agile, McNelley says, and it has shown "an ability to recognize … rising stars and partner with them," but it is still a larger company with less flexibility than a Silicon Valley startup.

"Oftentimes these entrepreneurial startups have a view … that a larger organization, just due to its size and its process, doesn't have," she says.

Smaller organizations can also take certain risks, she says.

PaidPiper is aware that its product, set launch at the end of the summer, is coming out ahead of much of the technology needed to support it. Its virtual card, which is displayed on a phone's screen, works for point of sale transactions, but the PaidPiper system is designed to work best with phones that have an embedded near-field communication chip for contactless payments, Hussein says. To allow its app to work with current point of sale systems, PaidPiper can offer a plastic card, he says.

In the U.S. there are four NFC-equipped phones that use Google's (GOOG) Android operating system. Microsoft (MSFT) just announced an NFC payment system for its next Windows Phone. Apple (AAPL) hasn't even hinted at an NFC payment system for its iPhones. Still, "the trajectory is in the right direction," Butler says, and more NFC phones will surely follow.

Hussein insists the timing of his company's launch is perfect. "We're in a cusp. If I start this company two years from now, I'm going to be competing with 100 other vendors like myself. I have to be a little bit earlier."

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