US Mobile Payments Primed for Growth By Todd Bricker and Shahzad Zia Momentum is building in the US for in-store mobile payments as smartphone ecosystem leaders unveil enhanced mobile payment platforms. The battle for mobile payments primacy is driving intense competition through internal innovation and acquisitions. Apple and Google are staking out leadership positions but there is still room for Mobile Network Operators (MNOs) to participate and benefit while helping to drive mobile payment growth. March 2015
Primed for Growth Although mobile payments have been possible for years, awareness and usage have been limited. Despite the efforts of mobile operators, technology vendors, financial institutions, and startups, only 16% of US consumers made in-store mobile payments between December 2013 and February 2014. 1 However, the potential for mobile payments grew considerably with the launch of Apple Pay and other recent developments that have resulted in the four mobile payment platforms shown in Figure 1. Figure 1. Leading US Mobile Payment Platforms * Digital payments during the month of November 2014, PayPal (78%) and Square (18%) lead digital payments History suggests that smartphone ecosystem leaders will extend their dominance to the mobile payment space through aggressive research and development, acquisitions, and 1 http://knowledge.wharton.upenn.edu/article/consumers-arent-buying-mobile-wallets-yet/ Copyright 2015 Cartesian, Inc. All rights reserved. 1
marketing to encourage universal adoption of mobile payments. According to analysts, the value of US in-store mobile payments is forecasted to grow from ~$4B in 2014 to ~$120B- ~$200B by 2018. Expected payment volume growth rates for the next few years are over 100%. 2 This expected growth can also be attributed to retailers becoming increasingly NFC-equipped. Currently only 30% of US terminals support contactless payments. 3 However, US credit card issuers and payment processors are pushing for compliance with global standards incorporating microchips. Credit card issuers have announced a liability shift (by October 2015) that will require retailers to support the Europay, MasterCard and Visa (EMV) global standard or risk assuming the consequences of payment fraud. What s most important is that almost every EMV terminal includes an NFC reader, enabling contactless payments with smartphones. As new terminals with NFC capabilities enter service, Apple and Google s reach will extend rapidly and mobile payment usage will accelerate. Achieving Sustained Success Existing credit cards and payment networks work perfectly well for most people. Therefore, in order to achieve widespread adoption, mobile payment platforms need to provide functionality that goes beyond in-store payments. Effective integration of device capabilities and solution elements from the broader ecosystem is required to provide enhanced value to consumers. A critical mass of the mobile payment functionality shown in Figure 2 must be addressed to motivate consumers to migrate to a new mobile payment platform. Figure 2. Mobile Payment Functionality 2 US Mobile Payments 2014: Updated Forecast and Key Trends Driving Growth, emarketer, September 2014. FORECAST: US In-Store Mobile Payments To Reach $189 Billion By 2018, BI Intelligence, June 2014 3 http://digitaltransactions.net/news/story/the-u_s_-emv-migration-produces-a-windfall-for-pos-terminal-producer-verifone Copyright 2015 Cartesian, Inc. All rights reserved. 2
Figure 2 illustrates the need to build on the basic mobile payment platforms that have been introduced. Mobile payment platforms will increasingly enable consumers to leave everything else at home. Imagine a day where NFC allows you to unlock and start your car. At lunch time, your smartphone uses a coupon voucher for a free sandwich as you make a mobile payment. On your way home from work, you receive a grocery list from your spouse and an integrated digital assistant routes you to the grocery store and through the aisles. This functionality will transform a pleasant mobile payment experience into a must have mobile ecosystem. Key Players in the US Mobile Payment Space With adoption low but awareness growing rapidly, actions taken over the next year may determine who dominates retail payments for the next decade(s). Figure 3. US Mobile In-Store Payment Platforms Technology Giants: Apple has focused on creating a secure, mobile payment experience. They have gained the attention of consumers and the backing of financial institutions through seamless fingerprint scanning and tokenization, where no customer data is collected or shared with retailers. Both new iphones and the upcoming Apple Watch support Apple Pay. To build on momentum with consumers and financial institutions, Apple should partner with retailers to extend platform functionality into loyalty and rewards. Google s strategy centers on collecting data to enable more targeted advertising, precision marketing, and predicative analytics. Google s purchase of Softcard and the agreements with AT&T, Verizon, and T-Mobile will rapidly increase its installed base. Google is also providing a Copyright 2015 Cartesian, Inc. All rights reserved. 3
mobile payment API that enable retailers to build their own payment applications and integrate them with Google Wallet. As the top Android device maker, Samsung is taking a backwards compatible approach to mobile payment by enabling users to pay at magnetic stripe readers and NFC terminals. While there are many unknowns about the Samsung Pay offering, the approach sounds promising even if Samsung will be fighting for mindshare with Google Wallet. Retailers: Retailers are looking to mobile payment technologies for cost reduction and revenue stream enhancements. Starbucks, for example, built a platform that integrates payment and loyalty. With 12 million users, 4 the app operates as a digital gift card and Starbucks customers scan QR codes from the app against proprietary barcode scanners to complete a purchase. Using their own mobile payment platform gives Starbucks control of how and when to collect customer data, and push rewards and promotions. MCX (Merchant Customer Exchange), a consortium of retailers which includes Wal-Mart and Best Buy, has built a mobile payment platform called CurrentC to circumvent credit card transaction fees. At Apple Pay s launch, CVS and Rite Aid, two major US pharmacy chains, turned off their NFC capabilities out of allegiance to the MCX-backed platform. CurrentC uses a white-label platform licensed from Paydiant (which was recently purchased by PayPal). 5 White-label platforms make it easy for retailers to offer stand-alone applications, but eventually retailers will likely need to partner with ecosystem platform leaders to avoid falling behind or being sidelined by consumers who would like to use fewer mobile payment tools. Mobile Network Operators: While US Mobile Network Operators (MNOs) have missed the opportunity to own the mobile payment experience, MNOs may yet impact the market by building mutually beneficial strategic partnerships with mobile payment providers in areas such as customer care, marketing, and global expansion. As Figure 4 shows, MNOs can leverage innovation centers, sector specific expertise, and channels to drive broader NFC use. They are more likely to gain traction competing in areas where they had success in the past, such as enterprise technology or pre-paid mobile services, rather than in mainstream consumer services where Apple and Google are likely to dominate. 4 http://venturebeat.com/2015/02/11/starbucks-app-gets-apple-pay-but-you-still-have-to-deal-with-the-qr-code/ 5 http://techcrunch.com/2015/03/02/paypal-paydiant/ Copyright 2015 Cartesian, Inc. All rights reserved. 4
Figure 4. Example Opportunities for Mobile Operators Conclusion Consumer interest in mobile payment is high following the launch of Apple Pay. Mobile payments will change how we purchase goods and services. To capture value from this shift, ecosystem participants need to add functionality to provide a more comprehensive experience. Broader functionality will increase adoption and usage while increasing platform stickiness and opportunities to generate revenue for platform partners. The implications of more ubiquitous and refined mobile payment platforms extend beyond the US. Established mobile payment approaches in Asia, Africa, and Europe will be subject to pressure as global solutions from Apple and Google gain traction. This disruption will offer mobile operators, banks, payment networks, retailers, and regulators in every region new opportunities to help enable mobile commerce solutions. Copyright 2015 Cartesian, Inc. All rights reserved. 5
Cartesian is a specialist provider of consulting services and managed solutions to leaders in the global communications, technology and digital media industries. For over 20 years, we have advised clients worldwide in strategy development and assisted them in execution against their goals. Our unique portfolio of consulting services and managed solutions are tailored to the specific challenges faced by executives in these fast-moving industries. Combining strategic thinking, robust analytics, and practical experience, Cartesian delivers superior results. Cartesian has deep experience helping network operators and other technology leaders achieve their objectives. We have executed strategic analyses and detailed assessments of mobile financial services opportunities and can support efforts in a number of areas, including: Adjacent opportunity identification and prioritization Mobile solution strategy development Partner scans and ecosystem expansion www.cartesian.com For further information, please contact us at cartesian@cartesian.com Copyright 2015 Cartesian, Inc. All rights reserved.