Signs of Life at the Pays

Not so long ago, mobile-payments enthusiasts were asking what ailed Apple Pay, Google Pay, and Samsung Pay. Now the Pays finally seem to be getting some traction, though their transaction market share is still minuscule.

Is there hope for the Pays? After a summer of generally positive developments, the mobile-payment services from Apple Inc., Samsung Electronics Co. Ltd., and Alphabet Inc.’s Google finally are showing signs of life.

Some of these signs are uneven, however. One researcher recently found that usage of Google Pay, formerly known as Android Pay, had declined since 2017’s third quarter. Google, however, reports that after a host of changes over the past year, Google Pay is resonating with merchants as well as consumers.

There are now more than a dozen general-purpose and closed-loop mobile wallets that enable U.S. consumers to pay with their smart phones. The best-known among the latter is Starbucks Corp.’s popular app aimed at its multitude of coffee and tea drinkers, but some merchant systems, such as Walmart Inc.’s Walmart Pay, are seeing strong growth.

Apple Pay, Google Pay, and Samsung Pay have come to be known as “the Pays.” What they have in common is they can be used for general-purpose payments in stores and in-app, and they all use contactless near-field communication technology. Apple Pay and Samsung Pay use phone-based NFC while Google Pay uses a cloud-based variant called host card emulation. Samsung Pay also uses a technology called magnetic secure transmission (MST) that facilitates contactless transactions with traditional magnetic-stripe point-of-sale terminals.

What the Pays also have in common is that most consumers, apart from a core group of enthusiasts, just haven’t been too excited about them. This indifference has persisted despite massive publicity, especially since Cupertino, Calif.-based Apple introduced Apple Pay in September 2014. Earlier this year, Visa Inc. reported that fewer than 1% of its U.S. face-to-face transactions originate on mobile phones (“Contactless II,” April).

Many merchants have been reluctant to accept mobile payments because of the perceived lack of consumer demand and extra operational steps needed to enable NFC transactions. But 3.1 million merchants now accept EMV chip cards, according to Visa. The new POS terminals accept contact chip cards, but a growing number also are configured to process contactless NFC transactions.

The Costco Breakthrough

In a global e-commerce and mobile-commerce forecast released in September, New York City-based 451 Research predicts that NFC-based mobile wallets will account for $65.8 billion in U.S. in-store sales this year, or 1.4% of the total. By 2022, the NFC wallets’ share will hit 4.1% on $210 billion in sales, for a compounded annual growth rate of 34%, 451 Research estimates.

The surest recent sign that prospects for the Pays are brightening came in August when Costco Wholesale Corp., the nation’s third-largest brick-and-mortar retailer, declared that it was now accepting Apple Pay, Google Pay, and Samsung Pay in its 519 U.S. stores.

Costco’s move “speaks to the increasing demand for mobile payments by consumers,” including but not confined to Millennials, says payments researcher Thad Peterson, a senior analyst at Boston-based Aite Group LLC.

Another hopeful sign: The big pharmacy chain CVS Health Corp. and convenience-store leader 7-Eleven Inc. will accept Apple Pay later this year, Apple chief executive Tim Cook told stock analysts July 31. 7-Eleven also said in September that it would accept Google Pay.

Both retailers had been part of the now-defunct Merchant Customer Exchange LLC, a consortium that developed its own mobile-payment service dubbed CurrentC. Merchants viewed CurrentC as a way of avoiding high costs of accepting the major card brands, and of boosting their own loyalty programs accessible through mobile apps. CVS, along with rival drug-store chain Rite Aid, stirred controversy in late 2014 by shutting off NFC readers in their stores to stop customers from using Apple Pay.

The NFC boycott lasted only a short while, however. And after some testing, CurrentC’s sponsors pulled the plug on the service in 2016. Instead, a number of former MCX stalwarts such as CVS and Walmart. turned their attention to their own loyalty programs and mobile apps.

While mobile-pay backers hailed Costco’s move, like so many developments in payments it came with a peculiarity. Notoriously picky about which payment forms it accepts, Issaquah, Wash.-based Costco said little about why it’s now embracing the mobile wallets. Its Visa cobranded credit card issued by Citigroup Inc., however, is a so-called dual-interface plastic enabled for both contact and contactless EMV transactions, and it doubles as a membership card. The retailer had recently outfitted its stores for NFC acceptance—two years after it dumped American Express Co. as its cobranded partner in favor of Citi and Visa Inc.

The peculiarity is that, because of Costco’s exclusive credit card acceptance deal with Visa, which took effect in 2016 when Citi replaced AmEx, an Apple Pay user who wants to pay with credit can only use a digitized Visa credit card. A Costco spokesperson would not say if that same policy applies to digital credit card payments with Google Pay and Samsung Pay.

Despite that oddity, Costco’s business goal in accepting mobile wallets and dual-interface cards isn’t hard to infer, according to Richard K. Crone of San Carlos, Calif.-based Crone Consulting LLC. Even if Costco isn’t taking every payment form the Pays support, fast mobile and contactless card payments will enable it to increase throughput at checkout counters, he says.

For many retailers, the coming of EMV chip cards, the vast majority of which are contact-only, over the past three years has slowed transaction speeds compared with the old magnetic-stripe cards they’re replacing, despite network efforts to speed up payments, according to Crone.

“They [Costco] are a multilane national retailer, they measure the transaction checkout in milliseconds,” Crone says. “This is about increasing store capacity, and getting rid of the EMV bottleneck.”

‘Muscle Memory’

The Pays so far have wrapped details about usage in a tight veil of secrecy, though they occasionally drop some hints. Analysts believe Apple Pay is the clear leader so far, and Cook revealed in July that it had surpassed 1 billion transactions in the quarter ended June 30. Cook also said consumers with Apple’s iPhone and Watch can use Apple Pay to pay for public-transit rides in 12 cities. And Apple Pay Cash, the person-to-person payments variation, is “already serving millions of customers across the U.S. less than eight months following its launch,” Cook said.

451 Research’s most recent Voice of the Connected Consumer survey found Apple Pay solidified its second-place holding among the digital wallets. The survey asks consumers about their usage of 15 digital wallets—some of which get considerable volume through desktops and laptops, not just mobile devices—to make a purchase during the preceding 90 days. PayPal Holdings Inc.’s wallet remains by far the most popular, used by more than two-thirds of 451’s respondents.

But 30.5% of the second-quarter respondents used Apple Pay, up 6.3 percentage points from 24.2% in 2017’s third quarter.

Apple “has done a good job on the awareness front,” says analyst Jordan McKee, a research director at 451. He adds that Apple has been “pretty aggressive in partnerships” with merchants. “Merchants are very quick to want to align with the Apple brand.”

Apple Pay might be getting more volume because it is finally addressing consumers’ desire to earn loyalty points and rewards, according to Aaron McPherson, vice president of research operations at Maynard, Mass.-based Mercator Advisory Group Inc. Echoing what critics have said for years, he says simply having payment capabilities built into phones is not enough to drive adoption.

“I feel that mobile wallets by themselves are just not enough of an improvement to overcome the muscle memory of pulling out a card, which is why they have been languishing for over 15 years,” McPherson tells Digital Transactions by email. “What broke the pattern was merchant wallets with built-in rewards. Now consumers are getting used to using mobile wallets, which could be contributing to the increased success of the Pays. Just this year, we saw Apple finally doing the merchant promotions that are necessary, and that sort of activity should continue.”

Seoul, South Korea-based Samsung, the No. 2 smart-phone seller in the U.S. after Apple, according to comScore Inc., in late August trumpeted some statistics on the third anniversary of its payments service. Samsung Pay now works with about 2,000 financial institutions in 24 geographical markets. Samsung did not release a user count but said the service has processed 1.3 billion transactions since its launch. Impressive enough, but way behind Apple Pay.

“Since we launched Samsung Pay three years ago, we have been dedicated to delivering a mobile-wallet platform that is simple, secure, and works almost anywhere,” said DJ Koh, president and chief executive of Samsung’s IT and mobile communications division, in a statement. “And we’re not limiting ourselves to a mobile wallet.”

Koh cited such features as Samsung Rewards and ATM transaction capability, both of which are available in the U.S.

Samsung also has worked to gain partnerships with other mobile-payment services, including Alipay and WeChat Pay in China and PayPal in the U.S. The PayPal deal, struck in July 2017, gave Samsung Pay entrée to e-commerce merchants through PayPal’s Braintree processing unit, and opened a window for PayPal into physical stores by riding in the Samsung Pay wallet.

Samsung has long recognized the importance of loyalty in generating interest in its payments service, according to McKee. Its rewards program enables users to accumulate more points at a greater rate for products from the mobile-phone and consumer-electronics giant the more they spend with Samsung Pay.

“It’s all tied into the Samsung ecosystem,” he says.

Its unclear how much transaction volume Samsung Pay has generated through MST, a technology it acquired when Samsung bought a Burlington, Mass.-based mobile-payments startup called LoopPay Inc. in 2015. A Samsung spokesperson did not respond to a Digital Transactions request for comment.

The recent 451 Research survey uncovered diverging usage of Samsung Pay and Google Pay, the former Android Pay. Both services are grounded in Google’s Android mobile-operating system. Some 10.4% of second-quarter respondents had used Samsung Pay, a 3.7 percentage-point gain in nine months from 6.7%. In contrast, Google Pay slipped from 15% to 12.9% in the same period.

“It’s interesting to see Samsung Pay and Android Pay going in opposite directions,” says McKee. “You can tell there’s some pretty good competition between the primary wallet platforms that exist within the Android operating system.”

Although today’s Google Pay, which debuted in February, represents a succession of rebrandings and service changes that some observers have said could be confusing to consumers, McKee attributes its decline less to anything Google has done and more to the “positive result of what Samsung has done” in promoting its mobile-payment service.

‘Much More Than It Was’

Earlier iterations of Google Pay included Google Wallet and Google Checkout, the latter of which first appeared in 2006. But under the hood, Google Pay represents a unification of Google services and will make mobile payments easier and more attractive for merchants and consumers alike, according to Jack Connors, the executive who heads commerce and merchant partnerships at Google, the primary subsidiary of Mountain View, Calif.-based Alphabet.

“Google Pay is much more than it was a year ago,” Connors said in August at the Mobile Payments Conference in Chicago.

In recent months, the payment service expanded to more countries, became available on Apple’s Safari browser as well as on desktops running Google’s Chrome browser, and added a feature to hold transit passes, Connors noted. For online merchants, the new Google Pay more easily moves shoppers from search to checkout.

“The world wants a unified, seamless experience at checkout,” he said. “The distance between the expression of some demand, the search, and the transaction has to collapse, has to collapse. So Google Pay is a way to give retailers who want to compete the opportunity to do their best equivalent of a one-click checkout.”

Google Pay is now the payment channel for anyone with a Google account that accesses such products and services as Gmail, Chrome, YouTube, Google Maps, Waze, and other Alphabet properties. Connors noted that Google Play, the app marketplace for Android devices, has 1 billion active users. Previous payment procedures didn’t make the links among Google products clear, according to Connors.

“If you have a Google account, the good news is that if you add a credit card, you can use that credit card on Google properties, and with Google Pay on non-Google properties.”

Google Pay received additional utility in the summer when capabilities to store tickets and airline boarding passes went live. Whereas a similar feature with Apple’s Apple Pay service displays boarding passes with quick-response codes, Google Pay not only displays QR codes, but also allows the passenger to redeem a pass faster by using NFC, according to Connors.

In the works for Google Pay are enhanced capabilities on desktop computers, improved security through mobile-device authentication, and added person-to-person payment features, including post-purchase bill splitting, Connors said. Google Pay also could find new uses through the Google Payments application programming interface that enables third-party software developers to integrate payments into smart-speaker systems such as Google Home, messaging, and other services.

‘Think Outside the Card’

Clearly, the Pays are working diligently to attract merchants and consumers to their services. But the key to getting any significant market share may be something more than just making the payment experience fast and affordable for merchants, and inducing consumers with rewards.

It also might involve re-educating Americans to think first about mobile devices, as consumers have in some other countries, rather than their familiar payment cards, according to Aite’s Peterson.

“We’re card-based thinkers,” Peter-son said at the Mobile Payments Conference. “Think beyond that, think outside the card, because outside the card is where the world is going.”

—With additional reporting by John Stewart and Kevin Woodward