During the past eight months, major mobile payments initiatives have been announced by some of the tech industry's most significant players. At the forefront are Apple and Google with Apple Pay and Android Pay, respectively. Additional offerings from Samsung, PayPal and others are expected to reach market in the near term.
The Aite Group, an independent research and advisory firm focused on business, technology, and regulatory issues related to the financial services industry, expects this rapid proliferation in mobile payment options to translate into tremendous gains for in-store mobile payments in the U.S. over the next five years. Aite forecasts that, after a projected $7.6 billion in sales this year, 2016 sales will grow to $22.4 billion and then roughly double yearly through 2020, when sales are expected to reach $487 billion.1 Such rapid change means merchants and consumers will have to adapt—fast.
Merchants Buy In
At Apple's developer conference earlier this month, Apple CEO Tim Cook announced that Apple Pay would be accepted at more than one million locations in the U.S. by the end of July. That is five times the number of locations available at the launch of the service just last October, and it's indicative of the rapid acceptance that contactless mobile payments are seeing among merchants. And when Android Pay launches this summer on more than half of all Android devices, it will work on the same terminals as Apple Pay—both rely on NFC (Near-Field Communication) technology. That's a boon for the potential user base; together, Android and Apple comprise 95 percent of the smartphone market.2
An EMV liability shift coming in October, which will place the liability for fraudulent credit card charges on whichever party—card issuer or merchant—that does not support EMV, will continue to drive point-of-sale (POS) upgrades as well; mobile payments are often supported by EMV-compliant terminals. The coming ubiquity of mobile-ready POS terminals3 also promises to take the guesswork out of whether and where mobile payment services can be used—a significant challenge in the past.
Consumers struggled to adopt earlier mobile payment options due to limited availability across devices and platforms as a result of wireless carrier restrictions and lack of NFC hardware. The field is different now: Companies like Discover are supporting both Apple Pay and Android Pay—as opposed to aligning with one or the other—so consumers won't be left wondering whether they have the option to use a given mobile payment service with their existing card.
Apple Pay will come pre-installed on all Apple devices and Android Pay will be on most Android devices, clearing another hurdle faced by earlier mobile payment offerings, like Google's own Wallet (consumers previously had to opt to download it). Consumers will find it simple to add their cards to the payment services as Apple Pay can utilize the same credit card associated with a user's iTunes account, and Google is following suit by making Android Pay the payment method for its own store, Google Play. Such frictionless onboarding processes and payment-method pairings (where consumers use the credit cards they already use, and are comfortable using) are crucial for consumer adoption.
Simplicity and Speed
Simplicity and speed are the most straightforward selling points for consumers and will likely drive much of the projected growth early on. Beyond streamlining the actual payment process, both Apple Pay and Android Pay will launch loyalty cards later this year, rewarding consumers with time savings (no digging for physical cards) and merchants with increased consumer engagement thanks to this ease of use. Starbucks has been a leader in this space over the last several years, increasing its mobile spend volume from $471 million in 2012 to $1.6 billion in 2014.4 To its benefit, the coffee giant created a checkout process faster than swiping a card while simultaneously integrating a loyalty program.
Coupled with additional mobile functionality like Bluetooth and geolocation, it is clear that mobile payments are poised to afford merchants unprecedented insight into their customers' needs and habits, which they can leverage to drive incremental sales and discourage defections to competitors.
While convenience is a key factor for growth, the security available through mobile payments is crucial as well. Troy Bernard, Director of Mobile Products at Discover, is optimistic about the potential security enhancements available through mobile payments.
“Tokens, biometrics, geolocation, IP address, and other types of customer data can be used to determine that the right person is using the right phone in the right place,” Bernard explained. “The trick is to close the vulnerabilities while leveraging the enhanced data that the phone provides.”
Tokenization is key, eschewing credit card numbers in favor of a unique set of numbers or characters (used by both Apple Pay and Android Pay). Tokenization protects both sides—consumers do not actually turn their credit card information over to merchants, and as a result merchants aren't tasked with storing sensitive credit card data.
Perhaps what the mobile payments industry has been missing until recently was clarity of vision on implementation. Now, with the two largest players gravitating to near-identical solutions, and Discover and other major credit cards on board for both, all signs point to explosive expansion in the coming years.
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