Payments on the go: Making sense of the evolving mobile payments industry

Start adding items to your reading lists:
Save this item to:
This item has been saved to your reading list.

March 2015

Enticing merchants and customers to invest

Although the market for mobile payments is estimated to hit $142 billion by 2019, adoption in the US is slow and fragmented.
The mobile trend has spawned countless mobile payment systems, but most have gained little or no traction among merchants or consumers in the US. With Forrester Research projecting that the mobile payments market will jump to $142 billion by 2019, the high stakes have driven innovators to keep trying with unflagging zeal to create solutions that allow customers to use their smartphones to pay for goods and services at brick-and-mortar locations.

It remains difficult for merchants who want to save money and better serve customers to figure out the best plan for participating in this increasingly important arena. While international payment options have established a foothold in regions where payment alternatives were slim, the challenge in the US and other developed countries is to go beyond a convenient and secure payments solution to offer a broader, more satisfying customer experience—one that encompasses a much larger value chain that could involve loyalty rewards, discounts, and other incentives and perhaps even perks and experiences no one has considered yet.

Whichever mobile payment system succeeds, it will have to appeal to both merchants and to customers, and it will have to solve multiple issues that have so far stymied adoption. These range from convenience and user experience to security and cost.

Evolution, not revolution

A short history of mobile payments
For years, companies have tried to figure out ways to make mobile payments simple, almost all without widespread success. Startups such as Bling Nation, FaceCash, FonePays, and Obopay have come and gone. Even larger, established companies have had trouble with mobile payment systems. Success is elusive because mobile payments are elbowing their way into an established, complicated ecosystem. Getting financial services players, card networks, merchants, smartphone manufacturers, and telcos to collaborate was never easy. The question of how best to avoid fraud risks was also difficult to answer. Merchants are also hesitant to invest. New payment solutions may require costly new point-of-sale devices and software implementations. If payment transactions are handled by another party in the process, merchants also fear losing insight into which customers are buying which items.

At the same time, consumers are reluctant to switch to a payment system that has not been proven to be more convenient or more secure than what they already use. Indeed, lacking additional incentives, consumers have little reason to switch to something that requires downloading a new app and shifting ingrained habits from a card swipe to a relatively more complicated smartphone.

The increasing importance of data

The importance of data revolving around the transaction is no longer a discrete question of what was bought and where. With data from many mobile devices, merchants can now unearth more context about a transaction than ever. Knowing this information provides the ability to digitally influence and measure sales. As seen in the figure below, analysts predict that location-targeted mobile ad spend in the US will triple between 2014 and 2018. Each participant in the value chain—merchants, issuers, acquirers, processors, and carriers alike—is scrambling to stake its claim.

The most salient underlying question for success lies in who controls the relationship with the customer and, therefore, who has access to transactional data. Thus, any successful mobile payment solution must start with a strong foundation of merchant support, and must address merchants’ concerns about potential fraud risks. That means mobile payment solutions must also take into account the cost to merchants of new technology that reassures customers of its convenience and confidentiality.

The importance of customer experience
At the heart of many technology solutions—especially those relating to mobility—is the question of customer experience. It’s particularly important because smartphone apps give many companies direct access to customers they have never had before, for example through indirect selling or mobile ads. How can enterprises make customer interactions so smooth and frictionless that they become a competitive advantage, especially in a digitized world where differentiation is harder than ever to achieve?

Clearly, replacing an action as simple as the swipe of a magnetic strip is not sufficient. Just as merchants have to derive an advantage in a mobile payment solution, so do consumers. Customers have already widely adopted a few app-based payment systems—those from Starbucks, OpenTable, and Uber among them—and their successes highlight key lessons that may also apply to other payment solutions. In short, mobile payment solutions must serve both merchants and customers to succeed.

What will the future of mobile payments look like?

We believe that the mobile payment solutions market must move beyond the transaction. The successful apps thus far only represent high-frequency customer relationships. The mobile payment scenario for casual, infrequent transactions still remains unsolved. It’s not the mobile-payment technology, per se; it’s the opportunity to establish digital engagement with customers.

Technology innovators must figure out how they can retain what makes the payments process work, while still creating ways to integrate advancements in a way that maintains the trust that both merchants and consumers have in the system. They must also work diligently to reduce complexity, providing payment capabilities that are not only as plug-and-play as possible, but as scalable as possible.

Merchants have an opportunity that cannot be wasted. They can actually sidestep the uproar over mobile payments and begin crafting their own branded, solution- and device-agnostic options that extend the intimate relationships they already have with customers.

All the players in the mobile payments ecosystem must also navigate a complex regulatory and privacy landscape that will continue to change. Merchants will need to balance their desires to completely control the experience against potential consumer backlash around privacy rights. Today, consumers typically will accept an application’s terms of use when they download it, ceding control of how the data is used. In the future, regulators may create laws that align this “opt-in” model with existing laws for sharing of financial services data. This means that app developers may have to separate a consumer’s ability to use an app from his or her permission to share data. They may also need to make it easy for consumers to opt-out of data collection at a later date.

There are no clear winners in the mobile payment solutions landscape yet, and no clear recipes for success. Ultimately, the path forward for merchants does not solely revolve around the two options of either building an app or partnering with one of the existing mobile payment providers. Rather, it needs to address multiple strategies targeted at gaining a stronger understanding of digital technologies and their potential for improving customer engagement.

Contact us

Gregory Holmes

Payments & Cybersecurity Advisor

Tel: +1 (415) 498 7435

Nathan Hilt


Tel: +1 (415) 498 8074

Phil Bloodworth


Tel: +1 (214) 754 7919

Paul Ritters


Tel: +1 (612) 596 6356

Bryan Oberlander


Tel: +1 (617) 530 4125

Scott Bauer

Principal Customer Impact Practice

Tel: +1 (678) 419 1128

Follow us