The Future of Mobile Payments

Here's why mobile payment adoption hinges on the customer experience.
Customer Experience

The ways in which consumers pay online and in person are rapidly changing. Instead of searching for cash or credit cards, contactless mobile payments promise a smoother experience where we can just tap or wave our phones to make a purchase. And given that smartphones handle an increasing number of daily tasks, a mobile wallet would be a natural transition.

But mobile payment companies still have several hurdles to overcome. However, those that focus on the customer experience will ultimately reap the most benefits, according to analysts and industry experts.

One of the reasons why mobile payments haven't gained traction yet is because they're not needed, says Greg Buzek, founder and president of research firm IHL Group. "Mobile payments thus far have been a solution looking for a problem," he maintains. "The reasons it has not taken off are consumers are not asking for it [and] it does not speed the transaction thus far."

Google, Apple, PayPal, and other companies are betting that consumers will eventually use mobile payment solutions and are spending enormous amounts of money to get consumers to replace their physical wallets with their versions. But the mobile payment road has been rocky. Google Wallet failed to take off andSquare Wallet folded (Square's deal to process payments for Starbucks has also ended.) Apple Pay with its emphasis on data security and consumer privacy has a strong chance to capture the market, but it faces competition from PayPal and other contenders.

The mobile payment stakes are high: Mobile-based payments in the United States are projected to reach $142 billion in 2019, up from about $50 billion currently, according to Forrester Research. In order for a mobile payment solution to gain traction, retailers, banks, and other service providers "need to provide value," notes Forrester Research Principal Analyst Sucharita Mulpuru. Consumers, she continues, want a solution that tracks "transactions and includes digital receipts, stored value cards, loyalty points, etc. Only Starbucks does that now."

Starbucks' rewards program and approach to mobile payments is a model for other businesses. Even before smartphones became common, Starbucks already offered its own proprietary payment option in the form of a Starbucks-only card. Starbucks also linked its payments cards to a loyalty program, making it even more useful for customers. And for customers accustomed to using Starbucks' payment cards, switching to an app-based version made sense as the smartphone became a central tool for managing daily tasks.

In November, Starbucks CEO Howard Schultz said the number of mobile payments made at its stores was growing by almost 50 percent annually during a Q4 earnings call. He also noted that payment companies were eager to team up with Starbucks. "Starbucks Coffee Company has cracked the code at tying mobile payments to loyalty and we are now receiving great interest in partnerships from mobile payment companies that see the value of our rewards program and the mobile payment behavior we established," he said.

It is unclear, though, whether Starbucks' success in mobile payments can be replicated. Part of the value in Starbucks' mobile payments app is that it accesses purchase data which the company can use to personalize its marketing and deals for each customer. Apple has stressed that Apple Pay doesn't collect transaction information that can be tied to individuals (which has led to a consortium of retailers favoring a "CurrentC" app-based payment system that collects and tracks customer information).

But if Apple Pay's merchant agnostic system gains wide adoption, businesses will have a hard time promoting store-specific payment apps. Customers won't care that store-specific mobile payments make it easier for retailers to collect shopper data.

Indeed, the debate over who controls the transaction data in a mobile payment solution is a fundamental issue, notes Pat Dermody, president of location-based shopping platform Retale. "Purchase data is incredibly important to a retailer because it's not just about retargeting; it's also important for inventory management and product flow," Dermody says. "Retailers need that mobile purchase data and they don't want a hole through a third-party provider."

Last year was marked by a spate of data breaches among major businesses like The Home Depot, Target, and JP Morgan Chase. Unsurprisingly, consumers are cautious about using a new payment method. In a Retale survey of about 1,000 U.S. adults, the top three concerns respondents had about mobile pay in-store were: data breaches and privacy (28 percent); possible theft or loss of my mobile device (17 percent); and difficulty keeping track of spending (10 percent).

Apple earned kudos from security experts for including strong security measures in its mobile wallet. Apple Pay uses a microchip to encrypt credit card account information and to keep transactions secure, Apple implements "tokenization." This replaces the actual card data with a unique token that is submitted at the time of purchase, as well as a one-time security code unique for each transaction. The security code replaces the credit card's CVV and is used to ensure that a transaction is being conducted from the device containing the Device Account Number.

Apple also added a built-in Touch ID that uses two-factor authentication to decrease the risk of a stolen iPhone being used to make fraudulent purchases. In case the device is stolen, users can also remote wipe their smartphone. Apple Pay's security measures are "definitely strong, but they're limited to Apple devices," notes Paul Kleinschnitz, senior vice president and general manager of cyber security solutions for First Data, a payment processing company.

Several of the data breaches that occurred this year happened when hackers exploited a weakness in a third-party vendor. Companies must be vigilant in maintaining security measurements and if a breach does occur, companies need to respond faster, says Rodolphe Simonetti, managing director for governance risk and compliance consulting services at Verizon. "Most organizations don't see security compliance as an ongoing issue-they see it more as a one-time project," Simonetti noted at a panel discussion during the National Retail Federation's Big Show. "It can also be a matter of weeks before companies react to a breach."

However, fears about data breaches are unlikely to derail the growth of mobile payment solutions or prevent shoppers from returning, Mulpuru maintains. "People say they may be distrustful but that doesn't really change their behavior," she says."It appears that even Target has recovered from its data breach of last year...sales seem to be back up in a competitive retail environment."

Providing a positive experience will determine whether customers pay with their phones. Employee training and providing plenty of help will be important in the early stages, Retale's Dermody says. "If you go into a restaurant or store and you want to pay with your mobile device, is it convenient? The training function will be really important for helping customers and moving the line along."

However, retailers have "a lot on their plates" and so mobile payment adoption may continue to be slow, Dermody adds. "Retailers have a lot of think about and a lot of places to deploy their resources but everyone wants to surprise and delight their customers, so my suspicion is we'll continue to see more experimentation [with mobile payment] first."