How E-gifts Can Be a Catalyst for Mobile Payments

David Douglas Stone

Looking for an early sign of success for mobile commerce? Check out the linkage of digital gift cards and mobile devices.

To say that “mobile payments” is the pervasive buzz phrase du jour would be an understatement. The mobile-payments ecosystem is getting more complex, not less, and is attracting more and more players.

These players are seeking to take advantage of rapidly shifting consumer behaviors. The ecosystem includes issuers, card networks, mobile operators, online payments companies, Google Inc., Apple Inc., and now, retailers, handset operators, and the emerging-payments platforms like Square Inc.

Take August’s announcement of the Merchant Customer Exchange (MCX), a mobile-payments system being put together by some of the country’s biggest retail chains. This development is indicative that mobile wallets and mobile payments are clearly a battleground that many of the constituents in the ecosystem are fighting to own.

It remains unclear who will win, or even how and if these competitive and complementary players will coalesce into a unified system. But there are ample indicators that mobile payments are here to stay and that adoption is beginning.

Consumer behavior is driving this adoption, with daily Internet usage on smart phones becoming increasingly significant.* In fact, consumers use a mobile phone more than any other device to access the Internet.* And, according to Forrester Research, 30% of U.S. mobile-phone owners are open to in-store mobile payments. That number jumps to 50% among smart-phone owners.**

Google with its Wallet and Apple with its recently announced open application programming interface (API) for its new Passbook app are ready to take advantage of these trends on the technology side. The financial institutions are in the game, Visa Inc. with V.Me and MasterCard Inc. with its PayPass mobile wallet. AT&T Mobility, T-Mobile USA, and Verizon Wireless have formed the Isis mobile-payments venture to compete with disruptors like Square and LevelUp. And now retailers are stepping into the fray with the Merchant Customer Exchange network mentioned above.

But none of these systems is perfect, and none has been clearly chosen by consumers as the path forward.

Mobile Web Gifting

So what is working in the mobile-payments field today? Mobile gifting. E-gifting is quietly becoming a successful incentive and gifting application. The adoption of the digital-gifting category itself is skyrocketing. An estimated 12 million e-gift card purchases took place in 2011, more than double the prior year, and through the first half of 2012, we estimate this number has surpassed 40 million.

Retailers are diving into the e-gift card game, with more than 65% now offering a solution. It’s no longer a nice-to-have but an essential component of a successful e-commerce strategy. Greater awareness by both retailers and consumers, coupled with more popular brands offering e-gift cards, is leading to a network effect, causing growth to accelerate at an exponential rate.

The convenience of being able to send an e-gift card any time from anywhere and nearly from any device, combined with an increasing array of personalization options, makes e-gifting a clear favorite for growth over traditional plastic options.

And now Mobile Web gifting (buying an e-gift card on the mobile Web) has become the priority for many brands in 2012. Consumers are now empowered to gift, thank, and incent on the go in an incredibly convenient way.

CashStar, which provides the world’s largest digital-gifting platform to more than 250 leading retailers and restaurants, has unique and rich data on consumer digital-shopping behaviors. These data show that digital gifting is becoming a major form of mobile payments. Of note:

– Retailers that offer mobile Web gifting or e-gifting as part of a wallet or mobile app are experiencing consumer purchase penetration on a mobile device as high as 30%. This is an increase of more than 240% over 2011.

– The percentage of consumers opening their e-gifts on a mobile device is as high as 35% for some retailers. This is an increase of over 300% from the prior year.

Starbucks is in a class of its own, with its closed-loop card and e-gift solution. There have been more than 20 million redemptions at the point of sale since Starbucks launched its mobile barcode-based system nearly 18 months ago, forever changing the world of mobile payments.

No Learning Curve

In addition, Apple’s June announcement of Passbook was notable for both the initial services included and for those not included. Significantly, Apple chose to introduce Passbook with everyday services such as Starbucks and Sephora gift cards, Fandango movie tickets, and American Airlines boarding passes.

What was not included was support for near-field communication (NFC), the radio-wave technology that links mobile devices with point-of-sale terminals. Both Google and Isis have embraced NFC, for example.

By making Passbook part of its iOS update for tens of millions of iPhone 3GS, 4, and 4S models and preloading it into new iPhones, Apple could drive a critical mass of user adoption. Passbook’s open API enables e-gift cards to be stored and made accessible right from iPhones alongside movie tickets, boarding passes, and coupons.

Plus, Passbook adds several convenient benefits for consumers and retailers alike, such as location and time alert for real-time communication for balance inquiries and promotions, tools that can greatly enhance

the customer experience.

So it is clear why e-gifts are a real catalyst for mobile payments. They are well understood and don’t require a lot of effort. They don’t require a special app, or an NFC-enabled phone, or any extra work on the consumers’ side—just access to the mobile Web or a retailer’s app.

For retailers, e-gifting platforms, both Web- and mobile-Web-based, easily integrate with existing gift card and barcode POS systems.

For now, barcoding will be the way to go for mobile payments, and simple closed-loop products like gift cards are key to its success. Mobile barcode redemption may in fact be the most friction-free and intuitive way to get adoption rolling. Already, Starbucks has made mobile closed-loop card payments a reality. Target Corp., Sephora, and several others also have 2D barcode scanners installed, and more retailers plan to do so as well.

Furthermore, barcode redemption requires no special chips or new hardware in a phone. Barcode-based payments lack some of the richer features of NFC, such as unification of multiple payment cards and client-side detection of transactions. But barcodes are easier for retailers to implement, and consumer adoption already is growing rapidly, with airlines and some entertainment entities leading the way.

Barcodes also offer several consumer-side benefits. For example, consumers don’t have to worry about forgetting plastic or installing a special wallet app on their phone. And, since barcode technology is not new, consumers are already familiar with it. There’s no learning curve to overcome.

The Key to Adoption

Retailers that embrace mobile Web gifting or include e-gifts in their mobile apps are going to be winners. They make it possible (or certainly easier) for the hundreds of thousands and eventually millions of consumers who are going to start showing up at the point of purchase (both online and offline) with their e-gifts. They will gain more loyal customers.

Increasingly, e-gifts are going to be part of mobile loyalty and reward programs. Gift cards used for incentives and rewards are a $30 billion market. The ability to deliver gift cards not only digitally but instantly and in a convenient manner is not only the way of the future but already a critical element to a program’s success. Companies like Viggle, Bridge2 Solutions, and Achievers are innovating in this space and driving real value for consumers and retailers with mobile e-gift solutions.

It’s important to remember that the real key to increasing mobile-payments adoption is the consumer, not the many companies pushing their own technologies. So, for any mobile-payment system to be a success, there have to be obvious benefits for the consumer, such as convenience and speed.

Even more important, there need to be tangible benefits like rewards incentives and personalized shopping experiences. And of course, this all relies on the user experience being intuitive and simple, not clunky.

Smart phones are offering more and more capabilities that consumers are getting comfortable with. E-gift cards in particular are an early means for driving consumer comfort and adoption. For example, the Starbucks program, its closed-loop card and e-gift card, is a primary example of early adoption. Consumers have demonstrated they are comfortable buying and paying for coffee and cappuccinos with their smart phones through their Starbucks wallets.

The real questions that still need to be answered before mobile adoption gains critical mass are:

1. When will enough retailers have POS systems enabled to accept mobile payments?

2. When will the many, and sometimes strange, bedfellows in the ecosystem stop competing for their own advantage and work together to develop a single standard for all consumers and retailers?

3. When will the companies that control portions of the mobile-payments ecosystem work together to provide real tangible benefits to the consumer?

In summary, while there are several barriers to mobile-payments adoption, there are enough successes already like Starbucks and new, well-thought-out, simple innovations like Apple’s Passbook to indicate a future in which mobile payments will become the primary means of paying, shopping, and incenting in the not-too-distant future. E-gifting is already going mobile. Other payment forms will soon follow.

David Douglas Stone is cofounder and chief executive at CashStar Inc., Portland, Maine.

* Google: Mobile Internet & Smartphone Adoption, 2011.

** Forrester Research, North American Technographics Financial Services Online Recontact Survey, Q3 2011 (US).