It’s a turning point for mobile payments.
As PayPal marks its second week as a standalone company independent from eBay, the platform is facing increased competition from Square — which is said to be mulling its own initial public offering — as well as the burgeoning Apple Pay, which says it is adding 80,000 small- to medium-sized businesses a month. Meanwhile, Samsung Pay, which started trials in South Korea last month, said that along with Master Card, it will soon launch its mobile payments system in Europe. A U.S. launch is expected later this year.
All this activity masks a major issue: despite all the players, the actual percentage of sales that occur this way to date remains tiny. Consumers using their smartphones to complete a sale in-store — different than just mobile commerce transaction, which is really just an e-commerce purchase that takes place on a mobile device — has a long to go before reaching critical mass, even though companies like Starbucks have been using this mode of payment for years.
The dominant player at the moment is PayPal, which has a two-fold advantage. Not only was it early to the space (it was founded in 1998), but its acquisition by eBay in 2002 allowed the platform to reap the benefits of having access to the marketplace’s enormous customer base.
Last year, the company saw $46 billion in payment volume, a 68 percent increase from the year prior, and processed one billion mobile payments overall. In the second quarter of this year, 30 percent of PayPal’s 1.1 billion transactions were conducted on a mobile device. The company also owns the peer-to-peer mobile app Venmo that enabled $1.3 billion in mobile payments during the first quarter of this year. Still, PayPal’s stock has not exactly zoomed, opening at $36.71 on July 6 and closing Monday at $39.39.
Then there is Square, Twitter cofounder Jack Dorsey’s company that went to market in 2009 with a mission to help small businesses accept mobile payment. It was rumored to have filed for an IPO last week, although the company declined to comment on plans to go public or reports that it saw an estimated payment volume of $30 billion last year.
Square has seen considerable success capitalizing on bringing a mobile POS to participating merchants who might not have been able to accept credit cards before. It also processes the payments for over 7,000 Starbucks locations nationwide and more than 50 Uniqlo stores in Japan. The former also contributed $25 million to Square’s Series D financing round in 2012.
The Starbucks tie-up is a major leg up, given that the coffee retailer is generally considered the poster child for mobile payments. “The way I look at it is that there is Starbucks – and then there is everyone else,” said Joline McGoldrick, director of research at Millward Brown Digital. “Effective equates them getting more people to use mobile pay than others.”
According to Starbucks, the company launched its Starbucks Mobile App and payment in the U.S., and today, 20 percent of all in-store purchases are mobile. About nine million mobile transactions are made each week. At the end of last year, a Starbucks Mobile Order and Pay app let customers place and pay for orders in advance in Portland, Ore., and a full national rollout will be complete by year’s end.
McGoldrick credited Starbucks’ success in incentivizing the mobile experience by offering rewards for using the service. If consumers get something out of shifting their behavior and paying via mobile, they have reason to switch over.
The problem is, though, not enough companies are offering such incentives. McGoldrick cited recent data from Gallup that found only 13 percent of consumers polled were using mobile wallets. While she cited “a lot of potential” for mobile, she noted that significant behavior conditioning lies ahead when it comes to getting shoppers to switch from a credit card to a mobile wallet mindset.
Even though mobile commerce and mobile payments are separate things, McGoldrick thinks the two are directly related. “The extent to which you can streamline the purchase on mobile and get it to under five minutes will directly increase peoples’ likelihood to use mobile to make those purchases.”
Once retailers are able to move towards cross-platform carts – meaning that something placed in your cart from a phone will also be made available to you upon entering a physical store – even more consumers will adopt mobile payment.
However, McGoldrick added that when it comes to naming a leader between Apple Pay or Google Wallet, it’s definitely too early to say. “Are we going to declare a leader because someone has a larger share of that 13 percent?”
Erica Orange, executive vice president and chief operating officer of The Future Hunters, agrees. Mobile payments, especially in the U.S., still lag behind much of Europe and China – where Ant Financial Services Group-owned mobile payment arm Alipay dominates. Alipay has hundreds of millions of users and saw the equivalent of over $9 billion in sales last year made by users during Single’s Day, Alibaba’s e-commerce holiday that occurs on Nov. 11 each year.
“There is more willingness on the part of the Chinese consumer versus the U.S. consumer when it comes to mobile payments. I think it also comes down to who is providing the service,” Orange said of Alipay. “Mobile payments in China are also growing alongside mobile adoption rates – hence, I believe, the greater willingness to pay via mobile. I think in the U.S., because we have been exposed to mobile technology for much longer, we view the device as serving a different function… so it becomes more difficult to adapt and adopt.”
According to Alipay, there are 400 million active registered users and 80 percent of transactions conducted on a mobile device. The company declined to reveal the amount of sales made on its platform on a yearly basis.
For Mark Willis, head of technology and innovation at consultancy firm Stored Value Solutions, consumer acceptance is being held back for one key reason: paying with traditional credit cards is easy, and – despite some high-profile cases of hacking hitting retailers from Target to Michael’s and Home Depot – for the most part secure. That and the fact that only a small percentage of merchants accept digital wallets at this time. But this is starting to change, especially with the introduction of Apple Pay.
He said that currently, about 2 percent of Americans have used a phone to make payments – and even though it’s starting from a small base, Apple Pay adoption has been impressive.
“Some sources are reporting that over 50 percent of consumers who bought an iPhone 6 have used Apple Pay,” Willis said, calling Apple Pay a “true mobile wallet” that fits seamlessly within Apple’s smartphone ecosystem.
“It allows bank-issued credit and debit cards to be securely provisioned on an Apple phone and transacted at the point of sale using contactless NFC technology. PayPal also has a mobile wallet application but it doesn’t use the same technology at the POS ,” Willis said.
In Apple’s second-quarter earnings call July 21, the company’s chief executive officer Tim Cook said it is “on track for Apple Pay acceptance at over 1.5 million U.S. locations by the end of 2015.”
Earlier this month, Apple Pay entered the U.K., and on the first day of service had over 250,000 locations supporting the product, as well as leading banks and debit cards. American Express will add Apple Pay support to its portfolio of corporate credit cards in August.
During a demonstration of the payment method last week in stores from Bloomingdale’s to Duane Reade in Manhattan’s SoHo neighborhood, Jennifer Bailey, vice president of Apple Pay, told WWD that the payment platform is currently accepted at one million locations. Macy’s was one of the retailer’s that was part of Apple Pay’s launch in last fall, with all 800 doors enabled to handle mobile payments via the technology. Bloomingdale’s, Express, Urban Outfitters and Sephora are other major retailers that accept Apple’s mode of payment.
Bailey said the long-term goal was to replace the physical wallet so a consumer could theoretically leave the house with just their phone or Apple Watch, which doesn’t need to be near a phone for Apple Pay to work (unfortunately, for all other aspects of communication that require the sending of data, from e-mail to texts, the phone must be nearby).
“We’re focused on everyday spending,” Bailey said, listing pharmacies, grocery stores and quick-service restaurants among the priorities for Apple (Duane Reade, Gristedes and McDonalds all use Apple Pay). She added that while these aren’t the only areas Apple is focused on — retailers like Macy’s, Sephora, Express and Urban Outfitters all accept it as well — the tech giant is going after “where the most transactions happen” versus where the highest-volume transactions happen.
Asked why it’s easier for a user to take out their phone to pay versus a credit card, Bailey’s response was simple: “Usually you [already] have your phone out.” That, and the fact that Apple Pay is more secure than a credit card. Because the actual credit card number isn’t stored on one’s phone or given to the merchant, theres also a dynamic security code so if a merchant is compromised your card number can’t be used anywhere else, and there’s device security like Touch ID.
Still, there are key differences between Apple Pay and some of its competitors, such as PayPal. For one, PayPal can be more widely used to make payments to companies, person-to-person, and with or without a credit card (users can use their bank accounts if they wish). It’s also not limited to a mobile device, with retailers like Saks Fifth Avenue using the platform as a method of payment on its site at saks.com
When asked how Apple Pay exploding onto the scene last year might affect business, Brad Brodigan, vice president and general manager of retail at PayPal, said that the company “feels good about our position.”
“We want to enable digital payments across all platforms that merchants and consumers broadly adopt,” Brodigan said. “We believe in providing merchants and consumers the choice of how and where they want to pay — utilizing what technology and point of sale hardware and software [they want to].”
That said, Braintree, the technology agnostic processing platform PayPal acquired last year, does work with Apple Pay in some capacity.
“Merchants can accept Apple Pay as a part of that processing solution. From that perspective, we enable merchants to accept Apple Pay,” Brodigan said, noting that this option is open to any of the tens of thousands Braintree clients, from Uber to Hotel Tonight to Airbnb.
But it’s the fact that PayPal’s tools aren’t limited to just a mobile device that is a key differentiator. That and the fact that the company remains solely dedicated to payments.
“Despite the amount of interest by lots of different players to get into the payment space, it’s really hard to be in payments as a part-time job. Payments is our DNA. It’s what we do, day in and day out,” Brodigan said.