Lowenstein's View: M-Payments are gaining traction, but don't leave your wallet at home

Mark Lowenstein

The recent developments in mobile payments are a classic example of a rising tide lifting all boats. As soon as Apple Pay became active, the curiosity factor drove more than 1 million iPhone users to launch their long-neglected Passbook app, download their credit card onto their device, and try out the service. Then, all of the sudden, CurrentC (the brand of Merchant Customer Exchange), and SoftCard (the brand of the AT&T/Verizon/T-Mobile JV), from whom we'd heard zilch in about a year, sprung to life. That you couldn't ring up your Huggies purchase at CVS with your iPhone became this week's #firstworldproblem.

With Apple Pay, Apple has done what it does best: create an easy and delightful experience. The reaction of consumers has been "yeah, this is cool," and "I could see doing this." Sort of like the same reaction you had the first time you experienced open road tolling or, as a small business, did your first Square transaction.

But the coolness factor is going to wear off quickly, in my view, when customers realize how few places they can really use Apple Pay (or any of the competing payments systems), and how we're likely to have driverless cars before we can really leave our wallet at home (actually, those two events might happen concurrently since we can then leave out driver's license at home too).

But the exciting thing is that, after years of tests, trials, failed ventures, and the industry talking to each other but agreeing on very little at "mobile money conferences," this thing is finally in consumer's hands. The game is on.

Apple Pay has set the bar for what the experience should look like. Ba-bang, we're there.

Ubiquity, the "battle of the ecosystems," and "loyalty/gift cards" are the three remaining hurdles.

Let's tackle ubiquity first. A week with Apple Pay demonstrates great promise but there is a long way to go before we can count on being able to use one's phone at a critical mass of merchants. No, I did not buy my first Egg McMuffin in five years in order test out Apple Pay. In fact, over ten days of fairly regular shopping and traveling behavior, I was able to use Apple Pay exactly once, at Walgreens. Trader Joe's, Best Buy, Regal Cinemas, Staples? Nope. My local movie theater, cafe, toy store, book store? Fuhgeddaboudit. Over time, despite the "battle of the ecosystems" (see below), we might get to a point where mobile payments can be used at the vast majority of major chains that now dominate our main streets and malls. But small, local merchants are the longest of long tails. Convincing small merchants to get NFC terminals and sign up for Apple Pay and/or other systems is going to take a lot of work. This would be a great project for Groupon's sales force…hmmm, maybe there's an idea there.

Second issue is "battle of the ecosystems." In addition to the already engaged Apple Pay/CurrentC/SoftCard battle, there are other heavyweights still trying to skin this cat, from Google to PayPal, Square, and VeriFone. Then there are about a dozen independent, maverick attempts at the market, from Loop to LevelUp. The thorniest issue, which surfaced in a big way this week, is when national merchants side with one particular "ecosystem," or don't play with one of the market leaders. Part of the problem here is that the CurrentC merchants, for example, have as their primary objective lowering credit card fees and getting customers on their branded cards. If the "CVS" situation manifests itself at other retailers, m-payments will have taken two steps forward but one step back. The looming standoff is like having SMS before there was interoperability.

The third hurdle is the preponderance of loyalty and gift cards that overstuff that wallet you supposedly want to leave at home. This is a solvable problem. It just takes a lot of work. But incorporating my Staples/Starbucks/CVS loyalty cards into my m-payments system, so I can be "one and done" with those, not have to remember passwords, instantly check balances and see coupons and offers--all in one place--would actually be more game changing than the five seconds I'm saving by not having to whip out my Visa card.  Plus, there's incredible stickiness once this is all loaded in and being actively used--sort of like setting up your "payees" in online banking. And there are a couple of companies, such as Blackhawk Network and InComm, that manage all those gift cards you see at your local grocery store or 7-11. They are already working with Google and others in making those plastic things digital. As I said, solvable problem.

The final hurdle is what I call non-merchant transactions. These are the day-to-day small transactions where the phone would be the natural and perfect payment mechanism. Parking meters, public transportation and parking garages are among the lowest hanging fruit here. Many public transportation systems already have contactless payment systems (such as the Charlie Card here in Boston). But getting the disparate systems, local governments, and other entities and constituencies involved to implement a more progressive, unified approach to e-payments is a gargantuan task. The irony is that for these types of transactions, the phone is the most natural home, and the technology is there to do it. But this is only likely to happen in baby steps.

How M-Payments Can Get Big -- Quickly
In my view, three things need to happen in the next six months in order for mobile payments to continue the momentum we have finally started to see. First, national merchants must agree to accept the contactless payments of multiple ecosystem providers. If you can use Apple Pay at Walgreens but not Rite Aid or CVS, there's not a lot of incentive to make mobile the 'default' mode for payments. Consumers have not shown a willingness to use multiple "apps" or systems in order to just pay with their phone. In short, as far as the national chains go, we must solve the 'interoperability' problem.

Second, we need a concerted effort to sign up the small merchants. Apple could be a big winner here. Imagine if it found a way to incent small merchants to install the equipment and sign up for its system, and use its market heft to perhaps take half a point off credit card fees. There's an interesting case to be made for Apple "subsidizing" the spread of payments if it could gain 5 percent to 10 percent of smartphone market share.

Third, we need some consolidation in the number of major entities chasing mobile payments. There are just too many "ecosystems" that have dug in their heels, advocating for their approach, not playing nice with anyone else--and holding back the whole space. Let's be clear: the technology to do this is here. It's now a business and political problem. Within the next 6-8 months, some of these guys have got to fold in the towel or combine forces.

Finally, there must be some relief on credit card fees for small merchants and micro-transactions. This is in the short term pain for long-term gain category. One of the Big Three should pull a maverick move, a la "Southwest not Charging Any Bag Fees" variety.

So, mobile payments is here. Really. But it's still gonna be awhile before you can leave your wallet at home.

 Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem.  Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein. 

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