Payments Innovation

There’s a perfect storm brewing in mobile payments.

And it’s a storm that the shift to chip cards in the U.S. has intensified.

That, in combination with the pressure on retailers to drive the top line and the massive ubiquity of smartphones, will only accelerate the move to mobile commerce in the U.S.

Finally.

A move that will likely take mobile payments right to the cloud – at least for a few big merchant sectors – and pretty fast.

There are a few numbers – and one now big consumer friction — that explain why.

First the big friction.

DON’T MAKE ME WAIT SO LONG!

I’m sure many of you’ve found yourself standing in long lines in the brick-and-mortar stores that now take chip cards. At checkout, customers forget they have to dip, so the cashier has to prompt them. Then the customer sticks her card in the terminal, and waits. She has to wait until the end of the transaction, which now takes longer, to stick her card back in her wallet. All of this adds many precious seconds to the process – maybe even a minute.

Lines at my local Walgreens in Boston during the lunch hour have lengthened demonstrably, which means wait times have, too — and at fully staffed checkout registers. Seeking relief, customers have gotten sneaky and found other places in the store to checkout to avoid the line.

Where this hurts most, of course, is in the QSR space which just wants to clear the line during the morning and midday rush as quickly as possible so that people don’t clear the line by walking out without ordering.

The solution, many now say, is NFC. The tap is faster than the swipe.

Absolutely true.

But there’s something that’s even faster, makes more money for the retailer and eliminates this now growing irritant for the consumer.

Mobile order ahead.

And it has the advantage that it can work with every single one of the 188.6 million (soon to be 200 million) smartphones owned by adults in the U.S.

Now for the numbers.

A HOP, SKIP AND A JUMP FAR, FAR AWAY FROM THE LINE

Starbucks calls mobile order ahead Mobile Order & Pay. In August, Investors Business Daily reported that mobile payments drove 20 percent of Starbucks’ total sales. Two-thirds of that was directly attributable to Mobile Order & Pay. Based on the ~$1.6 billion in monthly revenue Starbucks’ banks across its stores, mobile payments drove more than $211 million in sales in one month. And, guess what? That wasn’t too long after it was rolled out. Watch future earnings releases and look for that number to only increase.

Chipotle calls it Order On The Go. It’s no secret that Chipotle is struggling with the top line and its stock got creamed last week on what the Street said was “tepid” earnings. Its CEO has publicly acknowledged that he has the fix – to shift more of its business to Order On The Go. He says that two-thirds of the food ordered in his restaurants is eaten away from the restaurant. Yet, only 7 percent of that food is ordered online for pickup and carry out. But, he says that the kitchen operation that supports Order On The Go is staffed differently and follows a different process. It also drives $500 more a day in extra sales – today on a very small volume. He sees a future that’s only filled with upside as more emphasis is placed on Order On The Go, and that’s where he is doubling down.

Burger King just calls their mobile order ahead the BK App. Early results are even better than they had expected, executives say. Customers who use it spend 25 percent more, on average, with each order. That’s one way they think they can have it their way, please consumers and beat McDonald’s – especially at the all-important drive thru.

Brick-and-mortar retailers call mobile order ahead Buy On Line/Pick Up In-Store – or BOLPUIS. Recent survey data suggest that 59 percent of all retailers offer it now – because 78 percent of consumers say that they find it appealing. Last holiday season, 64 percent of online shoppers used the option, up from 4 percent the year before. But here’s the kicker.

RetailNext says that 30 percent of online shoppers use this option, and two-thirds of those who do, spend more money in the store when they get there to pick up their loot – and a lot more. Retailers love that consumers love the immediacy of the experience – and they love the double bonus they get, too. Not only do they get to save shipping costs, but they attract consumers whose increasingly scarce feet beat a path to their doors and when there, spend more.

Amazon calls it Amazon Fresh and Amazon Pantry and Echo and Dash. And it’s looking to cash in on its fair share of the online grocery market. When it comes to groceries, Amazon isn’t about giving consumers the convenience of skipping the line, but giving them the ability to skip the store completely. In 2014, buying groceries online was a $23 billion business, a modest share of the $1 trillion in grocery sales that same year. But it’s growing at a steady clip – up from $15 billion in 2013 and expected to grow to $100 billion in three short years. More than half of consumers surveyed said that they have increased the number of times they use online options to buy groceries. Not surprisingly, the number of times the average consumer visits the grocery store has declined, too, from 2.2 times in 2012 to 1.5 times a week, according to the Food Marketing Institute. Average order values online are also higher, Peapod reports that each order ranges between $140-$160. At $53/visit, that delta could be the result of frequency – Peapod customers order less frequently – or share shift as online grocery shoppers put stuff in their baskets that they’d visit other stores to buy, e.g. prepared foods, drugstore sundries, etc.

WHERE THE SHIFT WILL PROBABLY HAPPEN

Now let’s focus on the consumer side for a minute.

WHERE SHIFT WILL PROBABLY HAPPENThe U.S. Government gathers data that analyzes how the typical consumer – the ultimate customers for most everything payments and commerce – spends their paycheck. You’ll notice that they spend about 13 percent of their household budget each month on food – both inside and outside of their house.

That puts about 13 percent of consumer spend in a position to leapfrog the point of sale entirely to the cloud – as merchants put their muscle behind incenting consumers not to stand in line in their stores to order and then pay in the traditional way. And, with the incremental sales they seem to gain from these mobile order ahead apps, merchants may even have the spare change to reward consumers for doing it.

The same could be true for gasoline sales.

Gasoline and convenience store sales accounted for around 12 percent of retail sales last year. And, there’s plenty of innovation taking place at the pump.

P97 and MasterCard’s recent announcement is aimed directly at this market and transforming the experience. Ditto with Visa.

Cumberland Farms is already cashing in. This gas station and convenience store in the last two years reports selling $1 billion worth of gas via SmartPay. SmartPay is both a card and a mobile app. Its CIO reports giving away 1.5 million free drinks to any mobile app user who buys 30 gallons of gas. Doing some basic back of the envelope math, in just two years, at least 13.5 percent of its sales are being driven by the mobile app – a method of payment that doesn’t require that customers ever make contact with a gas pump or terminal inside the store to complete a purchase. And since claiming their free drink had to push the consumer into the convenience store to get it, those same consumers also probably ended up buying something they didn’t plan to buy while in there – donut, hot dog, candy bar, etc. Incremental sales!

Taking it a step further, The SAP Vehicle Delivery Program which launched last week will turn cars into enabling platforms for cloud-based payments at gas pumps and convenience stores, parking lots and even QSRs. There were 15.6 million cars sold in the U.S. last year. Sure, it will take more than a few production cycles for all makes and models of cars to be tricked out enough to conduct commerce, but cars are on everyone’s short list of “devices” that can enable a host of commerce applications without ever encountering a terminal in the classic sense.

Here’s another telltale.

APPLE PAY ISN’T REALLY KNOCKING CONSUMERS’ SOCKS OFF YET

As we know, merchants will follow the lead of the consumer when it comes to just about anything. And if enough consumers want to use a particular method of payment in their store, they will oblige.

That doesn’t appear to be Apple Pay, just yet.

We just got the latest batch of survey results from more than 2K consumers who, working with InfoScout, we survey each quarter. We monitor the payments methods used by consumers who own iPhone 6 and now 6s phones and who shop at stores that accept Apple Pay. We see what they use to pay for those purchases and then ask why they did or why they didn’t use Apple Pay.

The numbers this time showed a slight increase in those who’ve given it a try – 16 percent – in October 2015 compared to 13 percent in June 2015.

Those who like it say that they have a great experience.

What’s helped Apple Pay this time is the massive number of people with iPhone 6/6s in the U.S. As that denominator gets larger – 55 million today – the number of people who try it will increase. But at least for right now, not enough iPhone 6/6s users have had enough of a great experience – or are given enough incentives to make it worth their while – to remember to use it all of the time at all of the places they shop that accept Apple Pay.

Today – and still – unless it’s pretty painless for the merchant, it’s still a bit of a tough sell to ask them to reprioritize everything else they are doing in order to accept Apple Pay when only one out of every 100 customers that walks through their door uses it.

WHICH COMES FIRST, THE ONLINE OR THE OFFLINE?

As it goes in payments, not enough consumers banging their fists and demanding that a new form of payment be taken means that merchants will wait and see. Today, Apple Pay remains thinly penetrated in the largest retailers and is just about nowhere with the little guys.

The competition now isn’t just other contactless payments methods, it’s the cloud-based options that are delivering some rather compelling results for merchants who can use them to reinvent how consumers buy and pay for things in their stores.

In the face of the data that mobile order ahead is now showing them, and the simultaneous pressure to grow their top lines and reduce their cost of operations, all types and categories of merchants are examining ways to leapfrog the counter/terminal point of sale experience entirely and move to the cloud. They like what they see inside their stores when consumers place orders outside of them using their mobile devices. The consumer has a better experience, the merchants make more money and the pool of consumers they can touch is greatly expanded – each and every consumer with a smartphone can order ahead and pay, not just a few with the latest make and model.

And, if order online pick up in-store works great on the mobile device, it should work just as well when a consumer is standing in the store – why not! The offline to online blurring could get really blurry really quickly. Macy’s recent trial with PayPal is what that’s all about. It takes the notion of paying online, offline, and right inside the physical store using the PayPal app and/or the PayPal option inside the Macy’s app. The device that the consumer brings inside the store – their mobile phone – is the terminal and how checkout happens.

Once the consumer and the merchant are transacting together via a cloud-based app – independent of hardware constraints – that app can take them, literally, wherever commerce takes them – cars, appliances, clothing, you name it.

YES, I KNOW EASIER SAID THEN DONE

Of course, the one thing we know for sure is that doing anything in payments takes longer than anyone thinks it will. It’s possible, however, that as merchants contemplate their next moves at the point of sale amid all of the options now facing them – they’ll move more quickly on the option that they feel has the best chance of driving incremental revenues and customers.

Today, that looks like it might be living in the cloud.

So, does this mean that we’ll all be paying online and picking up in store for everything we do and everything we buy this time next year? Of course not, and probably not even three years from now. But if enough key merchants in key merchant segments get enough momentum in the near term, we might move more quickly from a process that replicates what they have now at the physical point of sale to something that reinvents it completely – along with their top line results.

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