People with a modicum of healthy scrutiny are definitely giving mobile payments a sideways glance. “It’s the next big thing!” we were told. Brands with household names like Google, Apple and Walmart were involved: surely this must be it.
But usage numbers are still trivial, even though we’re several years into mobile payments with multi-billion-dollar investments from huge corporations. Forrester Research hypothesized that only 1% of consumer spend would come from mobile by 2019 – that’s including online, in-person and peer-to-peer.
Current numbers for in-person, brick and mortar payments (i.e. proximity payments) are expected to be around $30 billion this year. This in a domestic universe of roughly $4 trillion in brick and mortar retail spend. For we mathematically lazy folk, that’s just three quarters of one percent: watch out!
For those who have been paying attention, there are two paths to skinning this cat: convince merchants to accept mobile payments, or convince consumers to adopt mobile payment applications and put pressure on merchants.
The last route was tried first – mostly because it’s a substantially cheaper option. Mobile payment apps abounded. Apple had a mobile payment method, as did Google. Then came phone companies, large retailers and even startups, all bumbling their way into the space.
The assumption with the consumer-driven approach is that you’re solving a problem painful enough for consumers to demand it. But that’s not the case at all. Proximity payments (those that occur in-person at the register) is a fabricated problem. My credit card is secure. It will not run out of battery. It’s waterproof. It weighs next to nothing and I can stick it in my sock.
That’s not to say that mobile payments aren’t growing elsewhere. If I want to pay for an Uber, buy something on eBay, or order something to-go, mobile payments are a great use case. But going to a retailer and paying with my phone in the checkout line? Seems trivial. Retailers have seen how slowly the uptick in consumer adoption for proximity payments has been and are doing things like giving associates an untethered iPad for card payments, or installing tablets at restaurant tables to eliminate register queuing.
The phone needs to fully replace the wallet if you want to make it the center of in-store payment. Right now my wallet carries my ID, which is not legally replaceable with my phone. It carries annoying receipts. It carries insurance cards and public transportation passes. What’s the hassle of carrying around a credit card if I already need a wallet to carry around all this other stuff?
On the other end of the stack you need to acquire merchants to accept mobile payments. As a consumer, this will need to be places I frequent at least weekly. Grocery is a good candidate, as are restaurants (good luck with that fragmentation problem). Retail is not an ideal candidate, since, at it’s current growth rate, the majority of spend will be transacted online in a little over a decade.
This is all well and good, but has anyone stopped to ask: where’s the value for the merchant?
In most cases the merchant needs to spend thousands on new credit card processing hardware to communicate with mobile devices. Apple has stated it won’t share any customer payments data with the merchant, so there goes a merchant’s entire marketing program. Google monopolizes data, so odds are that the merchant would pay for data insights or advertising products to see anything useful.
The simplest value, of course, is saving the merchant 3% on all purchases by eliminating interchange (the fees credit card networks, processors and the banks take from each transaction). If mobile payments is as great as is touted, there’s no reason for credit cards at all: consumers could use bitcoin, Venmo or some analogue to pay for goods, where payment transfer costs are pushed to zero. I think just about every merchant would sign up for that: an instant 3% increase to top-line revenue by doing nothing.
But here’s the issue: the entire payments chain is incentivized NOT to let that happen. Visa and the other payment networks earn ridiculous margins. Visa has a near 50% profit margin. By comparison, Google (Alphabet, whatever) “only” earns a 21% profit margin. Card issuing banks (the banks that sponsor your credit cards) also earn healthy revenue on each transaction, as do the large processing companies like First Data – whose job is to ensure merchants accept card payments.
Now why would all these players in the payments network, who own the merchant relationships, push merchants into accepting mobile payments and risk the possibility of being disintermediated? The simple answer is they won’t. And if you were the CEO for any of these companies you’d arrive at the same conclusion too.
So ultimately I don’t care how many surveys mobile payments companies produce: the market is not moving. I don’t expect proximity payments (in-store payments) to be a “thing” in the near future until it solves a real problem. Consumers have said there’s little value, and merchants who think there is value are finding in-store workarounds.
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