One Tap, Many Questions

 

In-app payments appear to be the long-sought answer to dismal conversion rates on mobile devices. But are consumers as comfortable with this payment method as many may think?

In-app payments, long used by mobile-gaming companies to enable consumers to buy digital goods, suddenly gained more notoriety following the 2014 debut of Apple Pay, which coupled in-app payments for physical goods with Apple Inc.’s marketing prowess.

As Apple demonstrated, in-app payments can make it a lot easier for consumers to shop using their smart phones and tablets. One tap of a button on an iPhone or iPad biometric sensor makes the payment and tells the merchant where and how to ship the goods, once the consumer sets up an account with their payment, billing, and shipping information.

The premise seems ideal for improving mobile conversion rates, which measure the number of sales against the number of users on a site. Above all, what retailers are hoping for is higher conversion, that millions of consumers will tap that button when using retailer apps set up for in-app payments.

Right now, many browse but dismally few buy. Mobile-commerce conversion rates, in comparison to e-commerce purchases made on desktops and laptops, are much smaller. The average U.S. e-commerce rate was 4.55% in the first quarter of 2015, compared with 2.46% for m-commerce, says Criteo in its “State of Mobile Commerce” report. Criteo S.A. is a Paris-based digital-advertising company.

Mobile accounted for 29% of e-commerce transactions in the U.S. and 35% globally, in the first quarter, according to the report.

Any increase in mobile-commerce sales means additional revenue for payments providers. While in-app payments could improve conversion, the method has its own disadvantages. These include consumer unease over mobile-payments security in general, availability of services, and unfamiliarity.

‘Bottlenecks’

Apple Pay isn’t the only service that’s making in-app purchases easier. Amazon.com Inc., the number-one U.S. e-commerce merchant, long has had a one-click payment button on its e-commerce site, and has it available in its app.

In May, Google Inc. announced a reboot of its mobile-payments service, giving it the Android Pay moniker and relegating its 4-year-old Google Wallet to duty as a peer-to-peer payments app. In addition to contactless-payment capability at point-of-sale terminals, Android Pay also offers in-app payments, which had been part of Google Wallet, too.

Card networks see a role for their services with in-app payments. Visa Inc. and MasterCard Inc. say multiple retailers have signed up to use their digital-payments products, which work with in-app payments.

The appeal of in-app payments isn’t hard to fathom. “There are a couple of bottlenecks when it comes to mobile commerce,” says Yory Wurmser, retail/e-commerce analyst at eMarketer Inc., a New York City-based research firm. “It’s just a pain to download payment information into a payment form.”

Indeed, typing in a 16-digit card number, along with address and identification information, on a smart phone screen is frustrating for many consumers, and a big reason why the mobile-commerce conversion rate is so much less than the rate for desktop users.

“With these payment systems, like Apple Pay, they give retailers the opportunity for one- or two-click payments from any app,” says Wurmser.

In-app payments may also address another mobile-payments concern: security. Of the more than 4,100 North American consumers polled in December by 451 Research, 84% cited security as the top concern, handily besting overall ease of use, 66%, and the availability of merchant locations, 64%.

The advent of Apple Pay last year, the coming debut of Android Pay, and digital-wallet stalwart PayPal Inc., which provides coding to integrate a “Pay with PayPal” button into iOS and Android apps, along with Amazon.com’s one-click, mean there is no lack of available options for consumers and merchants.

‘The Greater Opportunity’

The issue is that in-app payment acceptance, at least the one-tap option, is not used very much, Wurmser says. “A fair amount of consumers are buying stuff in apps,” he says. “It’s not that consumers are uncomfortable buying with apps.” They’re just not using Google Wallet and Apple Pay in large numbers, he says.

Wurmser has only anecdotal evidence from some retailers using in-app payments, and they are not divulging any metrics about that payment activity, “but they do say it makes a difference.”

These retailers may be some of the few accepting in-app payments. Only 28% of retailers in a recent survey by retail advisory firm Retail Systems Research LLC said that in-app payments provided a lot of value, says Nikki Baird, managing partner at the firm, in an email.

“Only 8% of [those surveyed] have implemented in-app payments,” Baird says. “Only 10% have budgeted projects for the next 12 months to 18 months, and another 24% report longer-term plans, but no budget.”

What that may indicate is that retailers are focusing first on mobile wallets, which are not confined to app-only use, Baird says, “perhaps because they see the greater opportunity to serve two needs at once: the in-app side, but also the physical-store side as well.”

Part of the explanation for the lackadaisical uptake for in-app payments may be the messaging from vendors, Baird says. “Some of the challenge may be that the vendors providing in-app payments haven’t done a very good job articulating the benefits,” Baird says. “This is the challenge for all payment technologies. It’s not enough for consumers to understand what’s in it for them, and it’s not enough for retailers to understand what’s in it for them. You have to educate both at the same time.”

Consumer Trust

Some merchants, and the consumers who shop their stores, do have that understanding. One example is Panera Bread Co., an early adopter of Apple Pay in its stores and in its app.

At Panera, consumers are replacing the traditional purchasing method with the app experience, says Bruce Dragt, senior vice president of e-commerce at Atlanta-based First Data Corp. “Usually that model has an inherent expectation of trust,” Dagt says, referring to the consumer’s interaction with the app.

Where consumers in the past would retrieve a credit or debit card from their wallets, they are now reaching for the app, he says.

This trust is evident, too, from the interaction consumers have with apps like car-sharing service Uber, where the payment is in the background. “Payment is a natural part of the experience,” Dagt says. In other words, it’s no longer a separate step.

“In this case, what we’ve seen is the nature of what it takes to do something new in payments,” Dagt says. “It takes convergence of a large number of consumers and merchants, with the constructs of standards around tokenization.”

Tokenization enables mobile-payments companies, like Apple and Google, to substitute the actual card number with a stand-in number that is useless should a criminal gain access to it. Tokenization may provide a measure of relief from the anxiety that many consumers feel when it comes to mobile-payments security.

Another aspect of the latest generation of mobile payments, and what makes in-app payments such an attractive prospect for consumers, is support of biometric readers in smart phones. Apple’s iPhone 6, 6 Plus, iPad Air 2 and iPad Mini 3 have Apple’s Touch ID sensor and numerous smart phones using Google’s Android include them, too.

“There is still a fair amount of concern among consumers dealing with mobile payments,” Wurmser says. To some extent, Apple Pay addresses these concerns with its biometric authentication, he adds. “People understand that the thumbprint is unique.”

“I’m bullish on the value of these in-app payment systems,” he says. “By increasing the ease of purchasing, it will get a lot more consumers to use apps to buy products. Also, it will get more retailers designing apps to take advantage of these capabilities.”

An app’s ability to authenticate the consumer gives it an advantage over an m-commerce Web site, Wurmser says. Dagt agrees. “It’s easier and it has the appearance of being more secure, especially Apple Pay with Touch ID,” he says.

‘Reducing Friction’

Even with the proliferation of in-app payment services and measures to assuage consumer anxiety about mobile payments, the key to furthering in-app payment success is boosting consumer awareness.

Persuading consumers to use mobile payments in general is a “daunting task,” as noted by Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consultancy that closely follows mobile wallets, in the June issue of Digital Transactions.

“In most respects, this elusive payoff reflects the overall difficulty in obtaining any return for innovating in payments,” Mott said. “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.”

Indeed, according to Wurmser, perhaps only 20% of a retailer’s customer base will download the app. Fewer still may use the in-app payment function. “Most commerce is still on the mobile Web because consumers are coming from Google search results,” he says.

Local mobile-search queries in the United States will total 81.8 billion in 2015, says research firm BIA/Kelsey, besting the forecast for desktop-search volume at 64.6 billion.

Some merchants, like Amazon.com, have a head start. With about 40% of Amazon’s customers enrolled in its Prime program, which offers expedited shipping, the online giant has a ready base of active shoppers, Wurmser says.

“It’s second nature for [Amazon customers] to buy with one click on their phones,” he says. “Even many without Prime are comfortable doing that.” Amazon.com, as an early provider of one-click purchasing, has the advantage because of that, Wurmser says.

Still, others may catch up. The heavy advertising going into in-app services, especially from Apple and card issuers that support Apple Pay, is helping to overcome lack of consumer familiarity, says First Data’s Dagt.

“This gives consumers a level of confidence and they can see how it works,” he says. The marketing, along with the security, like tokenization use, and the convenience of not typing in a 16-digit card number, “leads to an environment where merchants put it into their apps and consumers have cards they put into the apps.”

Once consumers are aware of and comfortable with the concept, convenience may then drive in-app payments growth. “It’s all about reducing friction,” Wurmser says. “Anything that simplifies the buying process will increase mobile conversions.”