More and more shoppers are using their smartphones not just to find promotions, research merchandise, comparison shop and place orders, but also to make actual payments on their purchases. Thus, retailers are adjusting their own systems accordingly. Apple, for one, created a buzz when it launched Apple Pay in late October. The new payment option is getting rolled out on the company’s newest mobile devices: the iPhone 6, iPhone 6 Plus and Apple Watch.
The technology to support these sorts of “contactless” transactions has in fact been around for roughly a decade. PayPal, Google Wallet and Square Wallet are some of the alternative systems currently available. The idea is to take the credit, debit and loyalty cards people carry in a physical wallet and stuff them into a digital “wallet” by means of smartphone apps, according to Peter Donat, senior vice president and head of new ventures at First Data, a Palo Alto, Calif.–based payment-technology services provider. This will enhance the shopping experience for both consumer and merchant, making the transaction more personal, more relevant and more secure — without getting too invasive or “creepy,” Donat says.
So far, consumers and retailers alike have been slow to embrace these particular payment systems. Drugstore chains CVS and Rite Aid are opting out of Apple Pay, Google Wallet and Softcard and joining Target, Walmart and others in a payment platform called CurrentC, which will help them dodge credit-card fees, collect customer data and integrate coupon reward programs.
Whatever the system, though, consumer reluctance is beginning to erode as people get more comfortable with the technology and the levels of security, and an expanding network of banks, credit-card companies and merchants are increasingly willing to accept and process such payments. “Frankly, where I think we are at right now is a tipping point where we have seen a lot of the trail blazed by other players, and I do think that Apple will further fuel the success of mobile commerce,” said Donat.
Mobile payment transaction value worldwide exceeded $171.5 billion in 2012, according to Gartner, an IT research firm based in Stamford, Conn. The firm predicts that volume will grow at a rate of 42 percent per year in the near term to reach $617 billion by 2016.
One of the main stumbling blocks to expanding mobile wallet transactions has been educating consumers and merchants about the technology and assuring them that the process is secure. Another hurdle is that the technology varies across different platforms — most systems rely on either near-field communication (NFC) or a quick-response (QR) code to relay secure payment information. NFC is a form of contactless communication between devices such as smartphones or tablets and a point-of-sale system.
Square Wallet uses a bar-code system for merchants to scan at the point of sale. Google Wallet and Apple Pay use NFC. The Apple iPhone 6 and iPhone 6 Plus are equipped with an NFC chip and an antenna system whereby the phone can communicate with the NFC reader at a point-of-sale system. The customer taps or waves the smartphone over an NFC-compatible device to transmit payment information.
Apple Pay is seen as a potential breakout thanks to the strength of the Apple brand, notes David Marcotte, senior vice president of market insights at Kantar Retail. The number of iPhone 5 users alone surpasses 200 million globally. “If that loyal customer base buys into Apple Pay as they do with other Apple solutions, then the whole mobile wallet concept could take off,” said Marcotte.
Retailer support for mobile wallet systems is growing. Apple announced that such leading brands as Bloomingdale’s, Disney Store, Duane Reade, Macy’s, McDonald’s, Sephora, Staples, Subway, Walgreens and Whole Foods Market are all on board to accept Apple Pay. The National Restaurant Association and other merchant groups have applauded the development of mobile payment technologies such as Apple Pay.
Perhaps unsurprisingly, the real driver behind the expansion of the mobile wallet will be the consumer. The number of smartphone-carrying shoppers keeps rising. Gartner estimates that some 1.2 billion smartphones and tablets were purchased worldwide in 2013 alone. At the same time, there is a heightened concern about credit-card security in light of some major breaches. The question remains whether the mobile wallet will be a more secure alternative or simply open another watering hole for hackers and thieves, notes Jonathan Spooner, a retail strategist at Control Group, a New York City–based technology company that provides digital strategy, product development and consulting services.
Apple contends that its system is a more secure method because the card numbers are not stored on the mobile device or on Apple servers. Instead, a unique device-account number is assigned, encrypted and securely stored on the iPhone or other device, and each transaction is authorized with a one-time number. Apple Pay becomes an intermediary that manages the transaction between the shopper, the retailer and the card company.
The app-based CurrentC payment system, now undergoing pilot testing for a planned launch sometime this coming year, will hold loyalty-card information and store and distribute digital coupons and special offers.
Retailers have only lately begun to bring in hardware for reading NFC chips or other contactless communication forms. “This is something that has proved to be somewhat of a hurdle for Google Wallet to gain adoption,” said Spooner. When Google Wallet was launched in 2011, few retailers were able to process the transactions.
Now the time could be right to get more retailers on board. U.S. merchants are in in the process of changing their point-of-sale systems over to prepare for credit-card security requiring use of the Europay, MasterCard and Visa (EMV) chip and PIN credit-card system. The EMV system is already widely used in Europe, and U.S. merchants will be required to have the card-reader technology in place by October 2015. Most of the systems that support EMV also have the capacity to add on NFC capability. Thus, the potential is there for retailers to choose a vendor providing one system that can accommodate both technologies. “I think the security concerns are being overcome, and the utility and convenience factors that go along with these products are becoming more and more meaningful,” said Donat. “So it seems as though the model is right at this stage to really ignite.”
