One of the most fascinating business stories this Christmas season isn’t about how much people are spending or even what they’re buying — it’s about how they’re paying. Although a lot of people are familiar with using their phones to pay for a latte — think Starbucks — few people in the United States have started using a “mobile wallet” to any significant degree. The biggest players in the field are trying to change this by offering up holiday incentives to bring customers into the fold.
Google Wallet, the mobile payment system unveiled by the tech giant in 2011, is trying to entice customers by offering those who purchase gift cards using its system a $5 coupon in return. Customers who link the competing Apple Pay system to a Chase credit card can opt for a free music download. Softcard, the telecom companies’ mobile payment system, has also been attempting to woo customers with a variety of incentives and discounts.
In fact, the whole “tap to pay” phenomenon may be reaching a tipping point this season. Spurred in part by security breaches at major retailers such as Target, Home Depot, and Michaels, customers appear ready to take the plunge and adopt the new technology. Apple’s system, for example, doesn’t save transaction information, and it is not necessary to show your credit card, security code, or name when making a purchase at a store. Currently, however, only a tiny fraction of retail outlets (220,000 out of 8 million) accept Apple Pay — including McDonald’s and Macy’s. Though, with current users believing that Apple Pay is convenient, secure, cool, and hip, excitement about Apple Pay is high. Whole Foods, for example, reports $4 million in weekly sales using the system.
And a third power player will soon join the field. The Merchant Customer Exchange — a consortium of retailers that includes Walmart and Best Buy — is set to unveil its own mobile-based wallet in 2015. Taken as a whole, the retailers participating in the Merchant Customer Exchange currently drive around a quarter of all spending in the United States.
Long-term research from Forrester, for example, expects the mobile payments industry in the United States to be worth $142 billion by 2019.
Three dynamics are driving innovation in this new field:
- Increasing convergence around a common standard: Apple Pay, Google Wallet, and Softcard all use near-field communication (NFC) technology.NFC, which is essentially high-frequency RFID, uses radio waves for information transmission between proximate objects up to 10 centimeters apart. NFC facilitates payment information transmission from smartphones to point-of-sale readers.
- Increased use by the all-important “tap-happy” 18- to 43-year-old demographic. According to a study by Thrive Analytics reported in eMarketer in October 2014, this age group currently accounts for about 40 percent of all mobile payment transactions. This still leaves plenty of room to grow not only in this segment, but also in the over-43 segment, which currently has only a meager 4 to 14 percent adoption rate.
- Growing consumer concerns about security. The theft of 90 million records from TJX in 2007 was superseded by the Target breach in late 2013 — the largest ever, with 110 million credit and debit cards compromised. That was followed swiftly by a breach at Home Depot with 56 million debit and credit cards affected.
Yet despite these drivers there are still hurdles to the widespread adoption of the technology. For one thing, the value to multiple stakeholders in the system — customers, retailers, telecomm companies, and financial institutions — has to be articulated and conveyed. While the Google, Chase/Apple Pay, and Softcard discounts are intriguing, discounting is rarely the surest path to long-term growth.
In fact, studies find conflicting evidence on the impact of price promotions on long-term performance. A comprehensive study in a premiere academic journal evaluating the relative effects of marketing mix variables finds product offerings to have the most important impact on long-term sales performance and discounting to be the least effective.
Therefore, rather than training customers to be deal sensitive, companies will need to focus on educating them about the value proposition included in mobile pay.
Global adoption of mobile payments outpaces that in the United States. Meeting true customer needs — here and abroad — is the only way to break old paying habits. It is high time we gave customers credit for being able to understand nuanced value elements as opposed to treating them as being unable to understand anything other than price discounts. After all, value not communicated is value not created.
Sharmila C. Chatterjeeis academic head for the Enterprise Management Track at the MIT Sloan School of Management and a senior lecturer in marketing.