Chasing Payment

Pay-by-cellphone, other conveniences on slow march to ubiquity.

By
Angel Abcede, Senior Editor/Content Development Coordinator

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Considering how fast a cellphone can pay for gas, you would think that the movement to mobile payment would have happened overnight. But the fact is that mass acceptance of mobile payment is moving slower than a figurative check in the mail. That’s because despite big pushes by mobilewallet developers, credit-card companies and banks, adoption has to come from two fronts: merchants and consumers.

Merchants are heading that way, with most factoring in mobile payment when buying new equipment, says Erik Vlugt, vice president of product marketing for VeriFone Systems Inc., San Jose, Calif.

“But they have to rely on consumers to have phones that are capable [of paying],” Vlugt says. “Even though just about all the phone companies are putting [payment capabilities] into their phones as of 2012, it takes 16 to 18 months to churn a typical smartphone. So it’ll take a few years.”

Overall, mobile commerce is expected to reach $31 billion by 2016, representing a compounded annual growth rate of 39% from 2011 to 2016, according to Forrester Research, Cambridge, Mass. Handsome numbers, but even at that pace, mobile is expected to be only 7% of overall e-commerce sales by that time. The steady albeit timid growth rate is the result of a number of trends that both drive and hobble the move to mobile payment. Consider the elements:

  • Electronic-wallet players: Google (through Google Wallet), Isis, PayPal, and major financial-services firms including Visa, MasterCard and Citi, all have become involved in significant mobilecommerce projects.
  • Equipped phones: Phones capable of near-field communication, or NFC— the front runner among mobile-payment technologies—are expected to hit the market in a major way over the next two years.
  • Standards deadlines: Mandates for U.S. retailers to transition to EMV (Europay-MasterCard-Visa) standards with take effect in 2015. The deadline may motivate retailers to include NFC along with the required EMV upgrades.
  • Growth in smartphones: Fortythree percent of mobile subscribers use smartphones today, with 101.3 million smartphone subscribers in the United States, according to research firm com- Score Inc., Reston, Va. Forrester predicts that smartphone population to be close to 100% of all cellphones by 2014.
  • Retailers crave ROI: Despite EMV mandates, retailers still struggle with return on investment for mobile payments, hoping to increase value with marketing and loyalty ties.
  • Other payment developments: Making payment more convenient goes beyond mobile, with line-busting technology allowing iPads to work as registers and accepting driver’s licenses at the pump to bypass drive-off concerns.

Still, despite the murky waters ahead, retailers are upbeat about the future of mobile payment. “It seems like everything is going mobile,” says Seth Blanks, general manager of retail for the nine-store Fast Stop Markets, Highland Corp., Hohenwald, Tenn. “People don’t carry around a date book or address book anymore. Certainly I see how the wallet will eventually be on your phone, but the time frame—who knows?”

“The mobile phone is … like what a full computer was 10 years ago, just in your hand,” says Todd Ablowitz, president of mobile-payment consultancy firm Double Diamond Group, Centennial, Colo. “You’re seeing all these different fronts moving to converge over time into that smartphone. Now we’re throwing in wallets.”

Taking Shape

Just what mobile payment will look like in a c-store is a vision that’s still fi nding form. Two main paths are taking shape. One has to do with the phone’s ability to communicate via wireless lines, texts or the Internet. The other works using NFC, the technology that uses transponders to send radio-frequency waves to initiate and settle transactions.

The fi rst one, which uses the phone’s multiple communication abilities, has spawned numerous options. Many are watching Seattle-based Starbucks and its application, which brings bar codes up on the phone’s display screen to identify customers and charge their accounts. During 2011, its first year of handling mobile payment, the coffee giant handled 26 million mobile payments. Customers can reload their cards, check balances and view transactions. Other related options use SMS (short message service) or text messaging to conduct transactions, much in the way people buy ringtones for their phones. Other methods involve Internet browsers, resembling online banking from home PCs, but with mobile phones. The SIM (subscriber identity module) card in the phone plays a role in data security, allowing for safe transactions.

A question many of these options raise for retailers is how a customer pays inside the store. These mobile capabilities will allow a customer to pay by standing anywhere in the store. And while a retailer wants to free up lines at the cashier, “mechanisms must be in place to ensure that loss prevention doesn’t become a barrier,” Vlugt says.

The second technology option for cellphone payment is NFC, in which a transponder chip placed in the phone allows a single tap on a reader near the point-of-sale (POS) to conduct transactions. Petroleum and c-store retailers are familiar with this style of payment; large players such as Houston-based ExxonMobil and Oak Brook, Ill.-based McDonald’s initiated efforts with contactless cards almost a decade ago.

In fact, part of the reason many believe NFC will become the dominant technology are those legacy devices. “NFC is backward- compatible with contactless,” Vlugt says. “So you have hundreds of thousands of legacy readers already out there.”

Bridge to NFC?

Just what mobile-payment technology will emerge as ubiquitous has yet to be determined, but Vlugt of VeriFone believes that NFC will win in the end.

He calls other implementations, such as Starbucks’ program, “bridging technologies, but not the endgame.” Beyond price, which he considers “negligible,” here are a few of his reasons:

  • Ease of use: Tapping the phone on a reader couldn’t be easier. With the Starbucks program, Vlugt says a customer has to have a certain phone and must be running the application to start the purchase. Sometimes the screen quality will make the barcode difficult to read. “Ninety-fi ve percent of the time it works,” he says. “And that’s fi ne for that retailer as an early adopter, but for my aunt or grandma … it’s not as user-friendly as it should be.”
  • Legacy equipment in place: As mentioned earlier, the implementation of contactless payment by major retailers in recent years has positioned many to accept NFC technology, at least for the most part. Stuart Taylor, vice president of product management and marketing for ViVOtech Inc., Santa Clara, Calif., clarifies that some players are already considering an additional standard for NFC, which retailers need to factor in if they have yet to purchase new equipment.

Though envisioning the eventual dominance of NFC, Vlugt says his customers will be the ones to dictate VeriFone’s direction: “We’re here for our customers.”

Big Players

Just knowing the players illustrates the gravity involved, with credit cards, banks, phone companies and nontraditional payment companies such as PayPal getting into the fray. Following just three of the mobile-wallet players reveals how big the stakes are.

Search engine Google came out with its Google Wallet option last year, playing off an NFC technology that allows users to load credit, loyalty and gift cards to make purchases. Mountain View, Calif.- based Google had Citi as its issuing bank, MasterCard as a payment network and Sprint as its initial mobile carrier.

A formidable opponent, Isis, is jointly owned by phone giants AT&T, Verizon Wireless and T-Mobile USA. The mobilepayment network is based on NFC technology and will have capabilities similar to that of Google Wallet. Bank partners include Chase, Capital One and Barclaycard, with testing going on in Austin, Texas, and Salt Lake City. Isis partnered with Visa, MasterCard, Discovery and American Express last year.

Online payment company PayPal, San Jose, Calif., announced plans to roll out its mobile-payment systems this year, extending its traditional online reach to brick-and-mortar stores.

A battle is brewing, according to Ablowitz of Double Diamond Group. The phone carriers have Isis, he says, as a way to gain control over who’s in the mobile wallet, reaping the benefits of the promotions and coupon activity.

Google wants control, too, but the carriers dictate phones specs. While Google has Sprint, it’ll have to work to broaden its partnerships with phone carriers to be successful, as will PayPal, he says. But all players will have to convince both retailers and consumers to adopt their solutions.

“In the world of payments, you want ubiquity,” Ablowitz says. “You want every consumer, every retailer, every handset on the same platform.” And Apple is lurking. “Apple has 225 million accounts on iTunes,” he says. “They have a huge percentage—28% to 30%—of handsets.”

Making the Case

Despite the fact that mobile payment makes sense from a convenience standpoint, Vlugt of VeriFone believes retailers need a stronger ROI to adopt the concept.

“If it was just about converting a credit-card purchase to a mobile device, it might be cool for early adopters, but in terms of ROI, it doesn’t translate,” he says. “But if you’re not only making a payment but communicating loyalty, transferring and redeeming coupons or applying a discount, then it makes sense.”

Current affinity-related tasks take three or four steps to execute at checkout, Vlugt says, not to mention that today, people’s wallets are stuffed with multiple credit, debit, loyalty and gift cards. “In a mobile environment,” he says, “this can happen in a single tap.” “Think of all the things I can do on a phone today: my list of friends, my calendar, my to-do list, my grocery list, and then there’s a big network of [retailer] information about me out there,” says Mike Finley, chief technology officer for hosted solutions for NCR, Duluth, Ga. “It’s my network and the retailers’ networks that will create an ecosystem of [enormous] value.”

Ultimately, the speed bumps between today’s reality and mobile-payment tomorrow will give way to a consumerdriven push, says Gray Taylor, executive director of PCATS, Stafford, Va. He says tech-savvy 20- and 30-somethings who are looking for ways to make their lives convenient will lead the charge.

But an even bigger force may be the socalled “underbanked,” Taylor believes. “It floors me how the lower-income demographic is moving to smartphones faster than the upper-income,” he says. “Our strategy was to have a computer and Internet access at home. They’re skipping that and doing everything from a cellphone.” 

Paying with a Driver’s License

Don’t forget the cash customer. That’s what eight-site retailer Bob Hohn had in mind when he invented a system that would allow people to use their driver’s licenses to turn on the pumps.

The issue was prepay. At a couple of his locations where crime and drive-offs were heavy,

Hohn, like many retailers, had to institute a prepay rule. Unfortunately, it added the possibility of a second walk back to the store for the customer. Hohn, president of Paxson Oil., Saginaw, Mich., started prepay a couple of years ago at two locations where he was experiencing two to three drive-offs a week. “I eliminated drive-offs but cut gallons,” he says. “They’ll give you $40 but could have bought a full tank. And other customers guess too high and have to come back in line to get their change.”

 Determined to find a solution, he was soon inspired by seeing a store cashier swipe his driver’s license for age verification. He asked a friend who had experience with health clubs IDs to help. They found a way for Hohn to read people’s driver’s licenses at the island and keep them temporarily as customers fueled their cars. Once customers pay, the cashier hits the “clear” button and the data deletes.

Since having the system in place as of last October, he’s had only three drive-offs; with the help of video recordings and the local police, he’s been able to identify all three culprits.

But the biggest benefit is customer convenience: “They no longer have to go into the store twice and don’t have to use a credit card if they don’t have one or … if they favor cash.” 


Cumberland, PayPal in Partnership

Mobile payment is making headway in the Northeast, with major regional player Cumberland Farms announcing a partnership with online payments giant PayPal.

The 600-store, Framingham, Mass., based retailer says it has developed a “first-of-its-kind” SmartPay app that allows customers to pay at the pump using a smartphone, while giving a five-cent-per-gallon discount.

The “app” works on any smartphone through a Web browser, and native iPhone and Android apps are available through their respective app stores. Cumberland Farms plans on building additional innovative smartphone products through the new SmartPay app.

Cumberland Farms hopes to build customer loyalty while driving new demand from the rapidly growing smartphone user base. “We are continually seeking ways to offer consumers convenience and value,” says Ari Haseotes, president of Cumberland Farms. “The SmartPay app does both. This app introduction is in line with the many ways in which we continue to evolve our company, from our store renovations, to our new food product introductions.” 


Mobile Numbers

Factors driving the move to mobile payment are numerous, ranging from the entry of mobile-wallet players to a consumer infatuation with smartphones. Here are a few stats: 

$670 billion Size of the mobile-commerce

101 million The number of U.S. smartphones as of last fall

43% The percentage of U.S. smartphone subscribers vs. overall cellphone users

5x How much more likely a smartphone subscriber is to make a mobile purchase vs. other subscribers

11% Percentage of consumers who said they were interested in mobile payments in 2008

36% Percentage of consumers who said they were interested in mobile payments in 2011 market by 2015

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