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Analysis: The mobile payments market

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The mobile payments market is still developing, but it’s already crowded and can be confusing. Claire Burke asks who are the main players and what’s in it for them?

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The mobile payments market is flourishing – it seems barely a week goes by without another new company entering the fray. But it makes for a confusing time for retailers. A proliferation of services means it can be difficult to know what to invest in and which company does what. So who are the main players, what do they offer and what do retailers need to know?

Although in-store mobile payment is still in its early days, retailers are interested – done right, it can improve the customer experience by speeding up payment and cutting queues, and businesses from Marks & Spencer to Waitroseare trying it. But the number of mobile payment solutions can seem bewildering, especially as not all of them are expected to reach critical mass.

Sandy Shen, research director for consumer services at analyst firm Gartner, says payment mechanisms can be divided into two camps – those using near-field communications (NFC), which is often referred to as contactless payments, and those that use mobile applications, such as PayPal.

She says: “We don’t expect NFC payments to hit the mainstream market until 2016. The market adoption has been slower than expected, there have been some technical issues.” The delay is partly due to the initial investment costs – NFC requires smartphones to have an NFC chip and merchants to have contactless readers. David Hodgkinson, KPMG’s customer and channel management practice, says apps are much cheaper: “Cloud-based branded apps can be a lot less expensive because they are not hardware based.”

E-wallet options

So what are the main options? In September 2011, Google Wallet was launched in the US. It is one of several e-wallets, including Visa’s V.Me and the O2 Wallet. An e-wallet is a payment method that can be used by any device connected to the internet, including smartphones. Google Wallet stores a customer’s credit and debit cards, and users tap their phone on an NFC terminal at checkout and chose which card to pay with.

The app will allow Google to obtain information on sales transactions, although some retailers will no doubt be reticent to share information with the search giant. If retailers allow their loyalty cards to be stored in the app, Google will also have information about a customer’s spending habits.

David Oliver, partner at PwC Consulting, says: “For Google, it’s all about data. They’re an advertising business. The piece of data they don’t have is how we spend our money in stores. This gives them access to that data.”

He says the most important consideration for retailers is who might gain access to their information. “They need to ask ‘who’s going to have access to that data and for what purposes?’ and ‘in what form is my data available to other retailers?’” he says.

Under the Google Offers programme, retailers are expected to pay Google for sending targeted offers and advertisements to individuals, based on their spending patterns. The company, therefore, controls the offers the customer receives.

Hodgkinson says: “They don’t charge on top of the interchange fee. They make money by selling services around the transactions the consumer is making. Retailers are paying to have offers put in front of the consumer via mobile devices.”

Physical stores

PayPal, meanwhile, launched its first major UK retail roll-out this year when Aurora Fashions decided to start using its services. The PayPal in-store app provides the customer with a unique barcode and transaction number, which the shop cashier scans to take payment from the customer’s PayPal account.

Oliver says: “For PayPal, very much an online-only business, it’s an opportunity to get into the physical store world for the first time.” Being a payment services company, it makes money on the payment by charging merchants an interchange fee.

But Hodgkinson warns that it’s fairly pricey: “PayPal will come under pressure because they are expensive.”

However, Shen points out that a key advantage is it is already a popular and widely known brand. She says: “PayPal has a big user base to tap into.”

In the US in March, a PayPal in-store payment system was rolled out across nearly 2,000 Home Depot stores. Customers can use a PayPal account by typing their mobile phone number and a PayPal account pin on an in-store terminal. The retailer did not need to install new software, instead upgrading point-of-sale equipment.

“There is another option for large retailers,” adds Shen. “They can have their own branded app, and customers can pay using PayPal.” She says McDonald’s in France is rolling this out.

Visa and Mastercard

Visa and MasterCard are also keen to play a leading part in mobile payments services and are obviously keen not to lose their role as a primary handler of payments.

Oliver says they are trying to protect their market share. “If you take the established bank and credit cards operators it’s partly protective,” he says.

Shen says Visa and Mastercard – which has expanded mobile payment service PayPass into a larger platform called PayPass Wallet Services – are trying to seize every opportunity.

Customers might soon use smartphones to pay where they would have previously used cash, and Visa wants to increase the number of small transactions it deals with. Shen says: “For Visa, it’s about capturing some of the cash transactions market because it’s an additional business opportunity.”

Visa’s V.Me digital wallet will launch in the UK on a trial basis in October 2012 with a wider roll-out expected next year. It will not include point-of-sale contactless payments at launch, but ultimately will.

Jon White, head of marketing for mobile strategic alliances at Visa Europe, says: “In the next 10 years, we can expect to see the creation of entirely new shopping experiences, where stores on both the high street and internet become seamlessly integrated and made accessible through the mobile device in the shopper’s pocket.”

Barclays’ Pingit adopts a slightly different approach. The app allows people to link their bank account to their mobile number to send payments and it enables a user to send money abroad. Hodgkinson explains that it is intended to rival services such as those provided by Western Union. He adds: “It’s a clever strategy because international payments is a big market.”

The bank does not charge for the service and those who are not customers with Barclays can still register to use it. The catch is the amount of data customers need to supply. “You need to hand over a lot of information, which lets them build a marketing profile for potential new customers,” Hodgkinson says.

Mobile phone operators also have something to gain from being involved in the mobile payment market. “They are seeing it as an incremental revenue stream,” says Oliver at PWC Consulting.

Wallet platform

O2 launched O2 Wallet in April, which works by allowing customers to preload money onto their accounts and use their phone to pay. The company is also involved in a joint venture known as Project Oscar, with Vodafone and Everything Everywhere, which owns T-Mobile and Orange. The venture will see the operators forming a company to create a mobile wallet platform.

Another option for retailers is to create their own branded app. Starbucks’ mobile payment app has proved successful. It works by allowing customers to load money onto a prepaid account and, when they want to pay in store, they press a button on the app which shows a QR code that is scanned.

Hodgkinson says it has been a success. “It works really well in terms of payment. It’s been very successful for Starbucks. The company processed 26 million mobile payments in 2011.” It also means Starbucks can keep control of customer relationship management and doesn’t have to pay someone else to put promotions in front of customers.

It’s a confusing business, and the mobile payments market will keep developing in the coming months – retailers who are interested will need to keep an eye on its evolution.


Author: retailaccounting

CounterBooks is an online retail accounting management suite which is used by retailers across the world.

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