How mobile payments will grow in 2016

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Sarah Silbert

Support for loyalty cards and strong security will sweeten the deal for consumers.

This week has seen no shortage of mobile payments announcements, from a partnership between AmEx and Apple Pay to the new Chase Pay app. This flood of news isn’t a mere coincidence; rather it’s the result of the Money2020 conference in Las Vegas. Still, all these updates highlight some significant growing pains in the mobile payments market. Namely, despite there being no shortage of options available across smartphone platforms, usage is still rather low.

According to a recent Accenture survey, while 52% of North Americans are “extremely aware” of mobile payments, only 18% use them on a regular basis. Unsurprisingly, Millennials and higher-income households lead the pack, with 23% and 38% using contactless payments at least once a week, respectively.

These stats may not seem downright disappointing—mobile payment tech is still in its early days, after all. But with eMarketer forecasting 210% growth in the total value of mobile payment transactions in 2016—up to $27.05 billion from $8.71 billion—it’s fair to wonder how companies will close the gap between awareness and adoption.

According to Jordan McKee, senior analyst at 451 Research, a recent policy change could help spur growth. “One of the biggest drivers…is the EMV liability shift, which is helping to seed the market with contactless point-of-sale terminals. The infrastructure is beginning to fall into place.”

Now that retailers have a financial incentive to support EMV “chip and PIN” technology, a proliferation of in-store terminals supporting it (as well as NFC contactless payments) can’t be too far off. And when consumers have more opportunities to use NFC-powered services like Apple Pay in store, it follows that both usage and awareness will grow.

Of course, that’s only part of the equation. Even if mobile payments are readily accepted at most retailers, consumers need to see a clear value proposition. Bryan Yeager, an analyst at eMarketer, points to Starbucks  SBUX -1.42%  as a model for success in this regard. The global coffee giant’s app, which handles payments and stores loyalty information, offers the convenience of a mobile wallet with incentives in the form of special offers. “More than 20% of their in-store transactions in the US are from their mobile app, and that’s a great success story.”

McKee agrees: “Most mobile wallets today are simply credit card surrogates; they’re a veneer over what already exists. This provides little incentive for merchants to upgrade their infrastructure and for consumers to change entrenched payment behaviors.”

Companies are taking notice, and adding loyalty-minded features accordingly. Android Pay, for example, is partnering with Coca-Cola  KO -0.41%  to award users points toward future purchases when they tap their smartphone to buy a Coke at a vending machine. Samsung Pay, meanwhile, will add support for loyalty cards and deliver push coupons to users’ accounts.

Finally, the are security concerns to address, and Yeager identifies these as a major inhibitor to mobile payment adoption. At the same time, he points to steps Apple  APPL 0.00%  has taken that could help reassure customers, including the extra layer of security offered through Touch ID in Apple Pay. Plus, “When it came out with Apple Pay, [Apple] made it clear that it doesn’t see any of the transaction data flowing through the system at all; it’s just the middleman.”

As to which of the myriad contactless payment services will gain the strongest footing, operating system-based wallets like Apple Pay and Android Pay may stand the best chance. “These solutions are tightly integrated into the device and remove many hurdles that have dogged competitors, such as onboarding and ease of use,” says McKee.

While hurdles like fragmentation and point-of-sale compatibility remain, the mobile payments market is indeed evolving. With both Android Pay and Apple Pay adding support for additional store and loyalty cards in the coming months, consumers will have more reason than ever to ditch the physical wallet.

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Apple vs Walmart: Mobile Payments Reveal A Clash Of Titans

Laura Heller

Contributor

There’s a battle shaping up in the retail world that pits two of the largest and most powerful players — Apple AAPL +1.52% and Walmart — directly against each other, thanks to Apple’s new payment platform. It’s an interesting example of an internal industry struggle spilling out into a public street.

The core of the matter is Apple Pay, Apple’s new mobile payment system that launched Monday. Simple, elegant and safe mobile payment options have long eluded retailers and technology companies, and Apple Pay promises to bring us a lot closer to a solution that both works, and works for consumers.

Apple Pay works with point of sale terminals equipped with Near Field Communication (NFC) technology. It lets users tap to pay, assuming they own an iPhone 6 and have uploaded a credit card to work with the program.

Not all retailers have NFC terminals and even a couple who do — namely CVS and Rite Aid RAD +5.42% —  have opted to turn off Apple Pay functionality. That’s because a competitive payment platform called CurrentC is forcing retailers to make a choice to accept one or the other.

Essentially, CurrentC is the product of the Walmart-led Merchant Customer Exchange (MCX). A group of big retailers and merchants that spent years trying to develop a system that would ease the burden of paying swipe fees to credit card companies. These businesses got together, built a platform and rolled it out, and then came head to head with Apple’s.

But MCX required participating merchants to pay an upfront fee and commit to three-year exclusivity, with some leeway within the first year of joining the exchange. CVS and Rite Aid are on this list.

So now we have an epic battle, a clash of titans. Apple, often viewed as the “good” guy in white, against big, bad Walmart. There’s even a boycott of MCX-supported retailers being discussed on Reddit.

But consider a few facts:

Retailers have been fighting so-called “swipe-fees” for years. Lobbying government to step in a reduce how much retailers must pay to credit card companies for the convenience of accepting their cards.

For the un-initiated, swipe fees ring up roughly $30 billion annually, according to the National Retail Federation. There have been a series of legal rulings attempting to cap fees, but the dance goes on with retailers actively seeking ways to reduce this burden and Walmart being the most active agitator.

CurrentC is the brain child of Walmart VP and Assistant Treasurer Mike Cook, one participant jokingly said MCX stood for the “Mike Cook Exchange.” CurrentC doesn’t work with credit cards, but rather links to shopper’s bank accounts and deducts funds much like a debit card, allowing retailers to avoid paying swipe fees.

Is Apple Pay a better system than CurrentC? By most early accounts, yes. It’s easy to use, more secure than the old magnetic swipe cards and terminals, and works rather seamlessly at checkout. Since it’s only available for use with the latest model iPhones — the iPhone 6 and 6 Plus — it is being tested by early adopters. This isthe ideal group to try  out new technology. They are willing to pay a premium for a new device; are eager to try new technology, often simply for fun; and very forgiving of start-up glitches and hiccups. On this, Apple really knew what it was doing.

It’s pretty premature to think that this is really a battle between Apple and Walmart, Apple Pay and CurrentC. Mobile payments are in their infancy and there will likely be room for several, including Google GOOGL +1.72%Wallet available to Android users. The winner will be the one that works best for the consumer, not just the retailer or technology developer.

Follow me on Twitter @lfheller, get my newsletter at FierceRetail

Why the U.S. Lags the World in Mobile Payments

Jacob Davidson @JakeD

Many American consumers are beyond excited by the prospect of Apple Pay, but overseas the iPhone's latest feature is old news.

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When Apple announced its new payment service, Apple Pay, earlier this month, many in the tech world were blown away. The system allows iPhone users to pay at the checkout counter simply by holding their phone to a receiver for a few seconds. Dieter Bohn, writing for The Verge, called Apple Pay “this week’s most revolutionary product,” and eloquently summarized how most Americans already feel about the status quo: “mobile payments have sucked so far, and it’s high time somebody fixed it.”

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Bohn is right, but what he likely meant to say was “mobile payments have sucked so far in America.” Across the globe in Japan, Hong Kong, and Taiwan, viewers of Apple’s announcement could be forgiven for falling asleep. Using your phone to buy stuff? We’ve been doing that for years.

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In Hong Kong, residents regularly pay for goods, services, and public transit, all without swiping or signing. Instead, shoppers can simply wave their Octopus card, which uses a technology similar to Apple Pay, at checkout and go on their merry way. Octopus Holdings claims95% of people in Hong Kong between ages 16 to 65 use its product, and Octopus is accepted at 14,000 retail outlets. Even more impressive, the card’s swipeless technology has been incorporatedinto phones, and yes, watches too. When did this magical future tech launch? Hong Kong has had Octopus since 1997.

Apple Pay-like services are also old news in Japan, a country where mobile payments are already ubiquitous. Afterall, it was Sony that invented the region’s major method of short-range data transfer. That technology eventually came to power Hong Kong’s Octopus card, as well as a slew of Japanese mobile wallets. Today, nearly every cell phone sold in Japan (other than the iPhone) comes with mobile payment technology built in by default.

Takeshi Natsuno, a former executive at one of Japan’s largest wireless carriers, once bragged, “When I leave my house in the morning all I take with me is my phone, which lets me do everything—pay, take public transport—simply by swiping a special reader in shops, stations or airports.” Sounds just like the promise of Apple Pay, except Natsuno said that in 2004.

But the world leader in mobile payments isn’t a glittering Eastern city. According to the Economist, that title belongs to Kenya and its revolutionary cell phone-based payment system, M-PESA. Launched in 2007, the service allows users to essentially text money back and forth while using telecom giant Safaricom, M-PESA’s creator, as a bank. Deposits and withdrawals are made through Safaricom’s network of 40,000 agents. Once money is in the system, it can be sent to any other M-PESA customer—even merchants—via a phone menu. Thanks to M-PESA, the Economist notes “paying for a taxi in Nairobi is easier than it is in New York.”

Why is the U.S. so far behind other countries? There isn’t a single answer. At least in Asia-Pacific, major players may just be more willing to adopt the latest tech. “The thing hindering mobile payment development and contactless cards is that there’s an infrastructure set up in place and banks [and merchants] feel compatible with the current infrastructure,” said Theresa Jameson, senior analyst at Datamonitor Financial. “Certain markets are more willing to adopt new payment technologies.”

New contactless payments for public transport have also helped put Apply Pay-like technology in the hands of every consumer. Hong Kong’s Octopus card, as well as Japan and Taiwan’s mobile payment systems, each originated as a better way to pay subway fares. Over time, merchants gradually began to get on board with the new technology until swipeless payment became a norm. Ben Thompson, founder of the website Stratechery, describes how this exact process played out in Taiwan when a new Octopus-like transit card was introduced:

When I first arrived in 2003 almost everything was cash only. Just a year earlier, however, in 2002, the EasyCard Corporation née Smart Card Corporation had rolled out an RFID stored value card for use on Taipei’s new MRT (subway) system… Within a few years you could use the card everywhere: buses, trains, taxis, parking, government fees, and now, 10 years on, almost every retailer, and the RFID chip is no longer limited to cards, but is embedded in some phones, key fobs, and more.

As Thompson points out, another reason behind America’s stagnation in the mobile payment space is simply the inertia of the credit card system. Magnetic stripe cards are accepted by as many as 9 million U.S. businesses, and it will take an enormous investment to make Apple Pay even half as prolific. However, in countries like Taiwan and Kenya, where credit card penetration is low, or Japan, where there is a cultural aversion to debt, new alternatives were given an opportunity to flourish because credit cards had not already dominated the market.

But as America slowly prepares to move from magnetic strips to Near Field Communication (NFC) systems like Apple Pay, Asia may be held back by its own form of inertia. “Japan and Hong Kong are faced with a dilemma,” says Datamonitor’s Jameson. “If they wish to begin using Apple Pay or other NFC-based mobile payment services, they will need to start from the ground up in building their contactless/mobile payments ecosystem like the rest of the world – which would require considerable investment.” Their other option? “Stick with their existing system while the rest of the world moves in a different direction.”

PayPal Will Win the Mobile Payments Race

Mobile Payments has been touted as the next frontier in retail for the past couple of years.  Most of the “buzz” has been around a technology called “Near Field Communications” (NFC).

For the layman, NFC is the technology that allows Samsung Galaxy phones to do that cute tap-and-share thing with videos that we see in TV commercials.  Everyone from mobile device manufacturers to retailers have hoped and believed this would form the technology foundation for mobile payments.  Visitors to last year’s CES (Consumer Electronics Show) reported hundreds of devices with embedded NFC chips.  There are real reasons why the industry hopes the technology will catch on, and I’ll get into that in a minute.  What the industry forgot to do was ask the consumer. In my view, as a method of payment, NFC is a non-starter.  And that’s why PayPal is going to win.

First, a few words about why the retailers and mobile phone providers are drooling over NFC.  As usual, the answer is “Follow the money.”  When a consumer swipes their credit card at a retail location, a digital journey begins: from the retailer, to a processing switch, to a clearinghouse, to the bank and finally back to the card provider.  Every single step on that journey is facilitated by some entity, from the credit card company to the bank, and a “toll” is collected at every stop.

Let’s pretend, for argument’s sake, the total value taken out is 1.5% of the transaction.  If the retailer (or merchant in more general terms) can disintermediate just one of the stops along the way, they get that percent back. Or divert it elsewhere.  So we see ISIS, a consortium of mobile phone providers hoping to get a piece of the action, and Walmart-backed MCX (Merchant credit exchange) which also hopes to grab a piece of the action.

While the numbers sound small, they can add up quickly.  Let’s use Walmart as an example just for fun.  Using a baseline annual revenue of $380 billion (I have a hard time even writing that number!), and assume 50% of customers pay with a credit card.  If the company is paying a 1.5% fee for each transaction, and can recoup just 25% of that fee, it gets to keep $712.5 million dollars.  Essentially free money.  Of course, if the mobile phone carriers can divert that money to themselves that’s a lot of free money for them too.  Again, they’re not doing much besides passing the data along.

So that all sounds really good, right?  No wonder everyone is racing to get in on the action.  There’s only one problem.  No one stopped to ask the consumer if this was something he or she wanted to do.  So far, the answer seems to be “not so much.”   I led a panel at a major retail charity event, to benefit RetailROI (more about that in a future article. This group is doing some very important work), and one of the panelists said, “If I have to reach into my pocket for something when I’m checking out, why do I care if it’s a credit card or my phone.  It’s still effort on my part.”  Yup.  That about covers it.  And it doesn’t even begin to address the security concerns of having payment in your pocket.  But that is secondary to the primary subject: it’s not so desirable.

That’s why my money has always been on PayPal.  I’ve used it in Home Depot, and I liked it a lot.  All I had to do was enter my mobile phone number and a PIN on the register keypad, and the transaction was complete.  I’d hear the reassuring ‘ding’ from my mobile phone in my handbag, and that was that.  No muss, no fuss.

Now PayPal has added a new feature, powered by Bluetooth called the “Beacon.”  The merchant plugs the Beacon in and it’s ready to interact with the Point of Sale (POS) system.  The consumer opts in (an important option) and selects the merchants he or she is willing to interact with. The consumer also is able to pick the hands-free vs. typed confirmation option.  Verbal confirmation is all that’s required.

PayPal has sweetened the pot by also offering a location-based service that lets you know nearby merchants that accept this form of payment.

I see this as a winner.  In fact, they had me at the Pin Pad.  I don’t like exposing my credit card to too many merchants.  And I can’t remember my bloody credit card numbers anymore…so it’s so much easier for me to use PayPal and pick the credit card of my choice.

So I’m going to go out on a limb here.  As a method of payment, NFC is dead.  Someone forgot to ask the consumer what she wanted.  And it isn’t that.