The State of Mobile Payments
Apple’s foray into contactless payments has put “mobile payments” on everyone’s lips, even though the industry has been growing steadily over the past few years. Purchases made using a smartphone or tablet rose 48% year-over-year to $8 billion during the second quarter of 2014. That growth is 3x that of desktop ecommerce, and it’s the swiftest increase in mobile spending since Q1 of 2012. By 2020, mobile commerce will account for more than 75% of the world’s online transactions, and more than 50% of spend.
In other words, mobile payments are hot.
Samsung has long held its NFC offerings over Apple’s head, but Apple’s Sept. 9 announcement not only introduced NFC to the iPhone lineup, but also Apple Pay, which launched Monday in the United States. It’s good timing, too, as U.S. mobile commerce is expected to hit a record $114 billion by the end of the year.
Apple Pay — which combines near-field communications with Touch ID biometrics and tokenization (via programs such as the MasterCard Digital Enablement Service) for secure, contactless payments — may be the tipping point that helps reluctant consumers take the mobile payment plunge. The two-step authentication process is seamless and secure, and even easier than removing a credit card from your wallet.
While today’s launch is exciting for iPhone owners, it must be reiterated that Apple is neither the first, nor the only player in the mobile payments space. Many established technology companies and payment startups have played in the space for years, forcing changes in consumer behaviors and helping people warm up to storing their precious credit card information on a smartphone.
Below, we explore the mobile payments industry, from its major players, to consumer sentiments and behaviors to the businesses that are transitioning to these high-tech payment systems.
Is the wallet dead? Not yet. But it’s nice to know you can still buy lunch if you forget it at home.
Apple Pay is Apple’s new mobile payment solution, launched on Monday, Oct. 20. It uses Apple’s Passbook app, NFC (in the iPhone 6 and 6 Plus) and Touch ID, the built-in fingerprint reader found in the iPhone 5S, 6 and 6 Plus. With Apple Pay, Apple uses biometric identification to verify that it’s you holding the iPhone 6 and tapping to pay with NFC. There is even a third factor of security — the secure element chip inside the phone — which can generate one-time use codes for payments.
Founded in 2009 by Twitter co-founder Jack Dorsey and partner Jim McKelvey, Square’s latest $150 million funding round valued the mobile commerce company at $6 billion, with a total investment of $590 million. Initially launched as an easy-to-implement POS system for small business — Square charges 2.75% per swipe and 3.5% plus 15 cents for a manually entered transaction — Square launched a consumer-facing Square Wallet app in 2011. The app was shuttered in May 2014 and replaced with Square Order.
Using near-field communication (NFC), Google Wallet allows businesses to accept payments online and in-store with a wave of your phone. Users can save targeted offers and gift cards to their Google Wallet app, and brands can implement loyalty programs to help merchants acquire and maintain customers. The digital wallet launched in 2011.
Softcard (named Isis Wallet until September 2014) is a joint venture between telecommunications companies Verizon, AT&T and T-Mobile. Founded in November 2010, the mobile wallet app lets users store credit card information, loyalty cards and coupons, letting consumers pay seamlessly without cash or physical cards. Softcard merchants include Aéropostale, Foot Locker, Office Depot and more.
If you’re still not sold on the idea of mobile payments, these consumer behavior statistics might change your mind.
Teens: As teens become more reliant on smartphones and social networks, they’ve quickly adopted mobile payment services such as Venmo, Square Cash and Google Wallet for peer-to-peer payment, making split dinner bills or IOUs easier than ever before. Per a Pew Research Study on teen cellphone ownership, 78% of teens aged 12-17 own a cellphone, and almost half of those (47%) own a smartphone. Those statistics have driven teen-focused retail stores such as Wet Seal, Urban Outfitters and H&M to mobile engagement to foster relationships between the brands and their teen shoppers. Though teenagers’ money is likely to be a cash allowance from mom and dad, these digital natives are often spending the money digitally.
Millennials: Unsurprisingly, millennials have becoming the quickest adopters of mobile payment, with 55% of mobile payments made by smartphones owners 18-34 years of age. A recent ComScore study shows that 81% of U.S. millennials owned a smartphone by the end of 2013 vs. 68% of 35-54 year olds and 40% of people aged 55 and up. It’s likely that many millennials who weren’t early adopters of the mobile payment trend will hop on the bandwagon in the coming year. In fact, 20% of millennials haven’t made a cash purchase over $20 in the past 30 days according to a 2010 study by CreditUnions.com — and that number is surely larger now.
Moms: Don’t put all of your eggs in the proverbial millennial basket, moms are another key consumer demographic — accounting for more than 70% of U.S. household spending. That same study shows that 89% of moms say their smartphone is by their side most of the time, and 42% of those mothers report that they reach for their smartphone first thing in morning. Always proponents of convenience, moms combine purchasing power with smartphone savvy, making them top mobile payment users.
Organic Avenue, a plant-based, organic food and juice brand with 10 locations in New York City, used to use the standard punch card to reward customers for loyalty, but the card was limiting and cumbersome for both the staff and the customers. Organic Avenue launched its own app last year (via Levelup), and it’s used by ⅓ of the customer base. That volume of usage gives Organic Avenue insights into customers’ purchase behavior and steers reward campaigns for these loyal customers, who appreciate the convenience of paying by phone “Mobile payment is becoming the norm for busy New Yorkers.” says Ashley Spiro, Ecommerce Manager. “And customers frequently comment that they really love the cash and product rewards they receive through the app, for birthdays and for various spending levels.”
Dig Inn founder Adam Eskin decided to build an app in order to gain more insight into his customers and improve their experience. “It’s really about starting to collect data to gain a better understanding as to the behavior of our customers — what they order, how often, etc. Having this information will ultimately help us serve our customers better, and provide the best farm-to-counter meal possible.”
The Birch Coffee team started using Square because it expedited transaction times and freed up baristas to spend more time preparing drinks that processing payment. “We are very attentive and are always looking for ways to enhance our customers’ experience,” says co-founder Jeremy Lyman. They started with Square in two New York locations two years ago and now use it in all four, and Lyman says going mobile has eliminated mounds of paperwork, since signatures are processed electronically via tablet or smartphone. “Our customers love it because it simplifies and speeds up their transaction. They just want their coffee!”