Mobile Wallet Wars, Part Two: The Rocky Road to Adoption

Getting mobile payments to click with merchants and consumers will require new models for digital marketing. And doing it right will take lots of money and time.

(Editor’s Note: This is the second part of a two-part examination of the current landscape for mobile payments. Part One, which sized up the five major players in the market, ran in the May issue).

It was four years ago in May that Google Inc. launched the “mobile-wallet transformation of payments” with a gushing, multi-media introduction of its first mobile wallet. That application purported to enable consumers to transact at the point of sale with specially equipped mobile handsets using near-field communication (NFC) technology. A wave or tap of the handset would replace the swipe of a plastic card.

And that would change everything. Except it didn’t.

NFC didn’t catch on (and still hasn’t, much); consumers didn’t show up (and still haven’t, much); and merchants remain largely on the sidelines, looking for a business model that makes mobile worth the effort.

Then, six months ago, in another bombastic media event, Tim Cook, chief executive of Apple Inc., bally­hooed the arrival of Apple Pay, a mobile-wallet application that would fix everything wrong with card payments (including what talk-show host Jimmy Kimmel mockingly described the next day as the “excruciating” experience of swiping a plastic card).

Amid widespread fawning over Apple’s ability to work magic with its customers, a chorus of pundits predicted Apple Pay would resurrect NFC from its near-death experience, lead an entourage of consumers pied-piper style to the mobile-commerce promised land, and give merchants (and banks) what they really want—access to the masses of well-heeled Apple iPhone users. But if any of that is happening, nobody’s talking about it with any real numbers.

New Reality

Instead, with transaction volumes too small to disclose, a longer-term market-adoption reality for mobile payments is sinking in: New business models that focus on driving consumer and merchant value will take time and effort to materialize, making participation in the revived mobile-payment wars a much more challenging prospect than originally thought.

While PayPal Inc., Softcard (formerly Isis, now defunct with its intellectual property sold to Google), Apple, Google, and others have invested hundreds of millions to lead the way to the mobile-commerce promised land (along with some 400 mobile-wallet providers worldwide that have come … and many gone … since that time), the return on investment remains very elusive.

In most respects, this elusive payoff reflects the overall difficulty in obtaining any return for innovating in the payments space. Plastic card payments are not broken operationally (albeit inefficient, fraud-prone, and overly expensive for users). As a result, changing payments behavior is a daunting task.

Nonetheless, investments continue to pour into payments innovations (“Flush With Cash,” March).

Why? For starters, only four years into a quixotic quest to utterly change how consumers pay and transact—when those functions aren’t broken—the 400,000 per day ($3.2 billion per year in volume) in estimated mobile payments at the register today isn’t really a terrible start. And mobile-based payments penetration of online sales is soaring.

But the Big Kahuna in payments is the point of sale, accounting for 94% of the $4.6 trillion in retail payments the U.S. Department of Commerce reported in 2014 for the year 2011. By that yardstick, mobile-at-POS payments are disappointing. As with other innovations in the hidebound U.S. payments system, change takes a long time and investors looking for a quick ROI must instead play the long game.

Pockets of Adoption

No doubt, over time, consumers will ultimately transact in droves digitally, with and without mobile handsets. In fact, there are pockets of consumer adoption that readily demonstrate the viral power of mobile convenience, real-time access, and ubiquitous connectivity when value clicks with consumers.

Starbucks remains the poster child for a single-merchant mobile app, driving16% of total transactions, with a low-fee store card for payment. Venmo, a Braintree/PayPal subsidiary, enables mobile consumers to pay others person-to-person in a social-network context. Business Insider projected recently that each is producing more than 7 million transactions a week and up to $2 billion a year in volume.

And merchant adoption in general—while frustratingly slow for industry providers—continues to grow, despite (or perhaps because of?) the multiplicity of different payment modes and offerings:

– Dunkin’ Donuts, like Starbucks a loyalty-based merchant mobile app using QR codes, has had 10 million downloads since its introduction in August 2012, generating a substantial number of transactions paid with the company’s low-cost prepaid account. Dunkin’ is also an MCX (Merchant Customer Exchange, a consortium of merchants comprising 25% of consumer spend, who own their own mobile-wallet scheme) merchant.

– Whole Foods was an early partner with Softcard and did a trial deal with Square, focusing on mobile coupons and access to drive traffic in-store for prepared foods and other high-margin products. In the early flush of business from Apple employees and industry testers, a report indicated that Apple Pay generated an estimated 1% of transaction volume (though that report appears to have been overblown).

– Subway committed to NFC (thanks to a reported terminal subsidy) with Softcard, but uses QR-code based Paydiant (for its own app with a prepaid account), and accepts Apple Pay among its 26,000 locations; it is one of the biggest Apple Pay merchants in terms of volume, along with Walgreens, Whole Foods, and the Apple Store itself.

– Other merchants (e.g., Macy’s, Foot Locker, Jamba Juice, etc.) have piloted and tested up to half a dozen mobile wallets. As of this spring, MCX was testing at seven of its 35 organizations (which have 80-plus brands), and is expected to launch a comprehensive deployment in Columbus, Ohio, this summer.

Moreover, research results are mounting that mobile-coupon redemption is proving to be motivational (20% redemption rates, vs. 10% online and 1% at POS), mobile-purchase transaction amounts are higher, and customer loyalty does increase with mobile use. So mobile payments remain an industry temptation, as industry learning continues.

Mobile-Payments Mantra

If we’ve learned anything from the first wave of mobile wallets and payments, it is that the idea of replacing a leather wallet or pocketbook with a mobile-wallet application has only limited user appeal.

Consumers, who typically approach new financial services very cautiously, and who loathe standing in line delaying people behind them when a transaction mode doesn’t work, don’t readily see the card-less convenience as very motivating. Even Apple Pay’s admittedly slick, transparent, and more secure checkout process has surfaced enough consumer-experience questions to revert industry focus back to other drivers of value—and hesitation.

Over the past two years, the mobile-payments mantra was cashing in on the sale of more goods and services to consumers through the interactive technology. Mobile-wallet providers joined the cascade of companies hoping to monetize online ads, coupons, and offers as the revenue drivers for their business models.

The trouble is, over the long haul, there isn’t enough in the way of discretionary income to re-direct purchases to float all the boats hoping to cash in on mobile-marketing commissions.

The average U.S. household (there are 120 million of them) has about $50,000 in annual income, of which discretionary purchases (mainly food, entertainment, apparel, personal care) in total amount to just $2,000 to $3,000 per year. If mobile marketing could place every single item in this smaller market basket with another brand, product or store, it would still only amount to about $400 billion out of $6.2 trillion in the total consumer economy (or less than 7%).

How many ads or offers for a 50-cent coupon on a tube of toothpaste will really be effective—much less sustain the 400-plus companies whose business plans rely on substantial commissions from mobile-marketing sales?

Moreover, while there is certainly value to consumers in being able to collect and sort and automatically apply discounts, coupons, and other promotional offers, the merchants that provide them don’t necessarily gain any value from the mobile (or digital) conveyance.

With hundreds of companies offering lower prices while capturing customer and transaction data for themselves, what’s the value of the retailer to the consumer, and the value of customer’s business to the retailer?

Nation of Narcissists

The industry’s initial answer to those hurdles was to find applications that solved problems and drove new value for both consumers and merchants. The first front-end application to do that is the order-ahead/pay-ahead capability.

The race to connect purchase-intention with purchase-execution via mobile devices started with PayPal and Jamba Juice, but has quickly spread to quick-service restaurants, coffeehouses, and other retailers where long lines and waits discourage consumers from completing the transaction. Mobile ordering and paying in advance locks in the purchase and solves the business problem for both parties.

But that innovation addresses perhaps only 5% of total retail interactions. How do mobile wallets drive value for the other 95% of commerce?

Some industry participants—most notably MCX—have been positioning their mobile-wallet offerings to help the consumer navigate an end-to-end retailing experience, managing and facilitating the 25 to 30 different points of interaction that influence everything from deciding if, when, and where to shop, to reviewing products, promotions, and deals while shopping and at checkout, and adjudicating loyalty programs and rewards throughout the experience.

That means figuring out how to identify, integrate, monetize, and control (especially the use of payment-transaction data) consumer use of their favorite providers of 25 to 30 different categories of services and applications in the total shopping experience.

For example, some Millennials relying on Foursquare for visits to bars and restaurants will be receptive to payment card offers and even new card applications as they use that application, as American Express Co. demonstrated.

Higher-income, value-conscious families might go for Plenti—the new aggregated rewards program (also from AmEx) that links patronage with benefits across one merchant per retail vertical. Spontaneous shoppers with no particular retail agenda prefer to be entertained by ShopKick.

The trick is that different consumer segments might use six to eight of these applications, but not the same six or eight. So, to reach critical-mass adoption, the providers must have the wherewithal to match up all of the digital-lifestyle preferences with stylized business models for supporting services from merchants.

So, one-size-fits-all doesn’t fly in digital retailing. We’ve become a nation of narcissists who aspire to be unique, but adopt trendy, cool applications in droves when the value equation fits.

The Smart Money

That puts the smart money for mobile-payments adoption on the control aspect of the end-to-end retailing experience.

Consumers certainly want choices in how they pay with mobile devices, but what they really want is the self-perception of being in control of what happens to them as they shop, as data from market researcher Phoenix Marketing reveals.

Providers, then, must selflessly submerge their own business-model priorities to create the impression among users that they are calling the shots in mobile marketing, even if the wallet application works to foster the perception that there is unlimited choice.

This is no mean feat by any stretch. Indeed, it is likely to be several years before a complete, end-to-end solution driven by a mobile wallet or payment provider will materialize.

Perhaps the farthest-along in this evolution is Paydiant’s open, white-label wallet platform—now owned by PayPal and used by MCX—and MasterCard Inc.’s MasterPass.

But there’s still a long, long way to go before consumers can virtualize and mobilize what they can do on a handset on par with the choice and control they have in the physical realm. And it’s going to take a boatload of money to put all this together.

So the mobile wallet and payment wars are just getting started. Buckle in!