It’s lunch hour in Boston’s financial district and the line at Boloco, a fast-food burrito chain, is long. A few people stand with credit or debit cards in hand, but most are holding their smartphones as they advance toward the register.
A cashier glances at a customer with his phone at the ready.
“Oh, hey, ‘LevelUp,’” the cashier says. The customer with the LevelUp payment app holds his phone up to a device mounted near the register. The cashier nods as LevelUp, linked to the customer’s debit card, recognizes him by the code displayed on his phone. The app charges the customer’s bank or credit-card account. The man goes off to pick up his burrito. The transaction took five seconds. The next customer steps up, phone poised.
The Mobile-Payment Revolution
That people love their smartphones is no longer debatable, and they want to integrate them into every part of their life, including shopping. A June study by Deloitte found that 58% of consumers who own a smartphone have used it for checking and comparing prices while they shop. The same study reported that mobile will influence more than $159 billion in sales this year. Gartner predicts that will reach $617 billion by 2016. It’s not a stretch, then, to project people using phones as their primary means of purchasing items in stores.
In a Forrester survey released in August of about 7,600 U.S. adults, 30% of mobile-phone users expressed interest in paying by phone. More tellingly, 65% of consumers age 25 to 34 have reported already using their smartphones to shop.
Currently, the mobile-payment trend is extremely consumer-focused, says PricewaterhouseCoopers principal Drew Luca. Mobile-payment providers are attempting to change lifelong purchasing habits by incentivizing (through discounts, loyalty programs, and prizes) people to ditch the plastic in favor of the phone.
For businesses, the benefits to adopting mobile-payment technologies include speeding up the transaction and potentially lowering the merchant’s transaction costs. Perhaps more important, accepting payments via smartphones allows businesses to collect more information about their customers to deepen their understanding of the customers’ buying habits. Plus, it enables easier implementation of loyalty programs (no wheedling to get customers to fill out forms) that keep them coming back.
“Data is what’s in [mobile-payment technology] for the merchant,” says Luca. “Data, and how it can be mined and leveraged and used.”
Everybody’s Selling Mobile
Following in the footsteps of Starbucks’s widely adopted mobile-payment app (more than a quarter of the coffee chain’s transactions, according to Starbucks, are now via mobile), major players like Visa and PayPal and telecom companies such as Verizon, AT&T, and T-Mobile are all experimenting with turning your phone into a wallet or credit card.
Google announced in July that its Wallet app — in which select Android phones substitute for credit cards using near-field communication technology — will in the coming months work at more than 20 retailers, including Macy’s, CVS, and Banana Republic. But Google’s service is currently available on only six phone models, and it offers no incentive for consumers beyond the cool factor of paying with the device.
Square’s “Pay with Square” app uses location and recognition software to help cashiers identify and charge customers, who need only say their name to pay. (Square recently announced a partnership with Starbucks.) And LevelUp makes money from the marketing and loyalty campaigns it provides to merchants to make their goods and services stickier. For example, if a customer spends $50 using the LevelUp app, she can earn a $5 credit. That keeps her coming back. Meanwhile, LevelUp takes 40 cents on every dollar of that credit redeemed by the user.
The Need for Speed and Knowledge
Boloco CFO Patrick Renna implemented LevelUp in the company’s 19 stores in April. According to Renna, the $20 million privately-held chain has seen promising results so far in both sales volume and velocity.
“Right now, we’re doing about 4% on mobile payment,” Renna says. “Our transactions are at 53% on credit cards right now, and as soon as we can start to chip away at that, that’s when we’ll see the big difference in sales volume.”
Speed tests conducted by LevelUp indicate its process is 33% faster than a typical credit-card transaction and 66% faster than paying by cash. That can make a difference during morning rush hour when a coffee shop is swarming with customers needing a quick caffeine fix.
“If you don’t have to wait for the receipt to print out, you may think that’s not a lot of time,” says Luca, but he believes that customers are acutely sensitive to how long it takes to get and pay for what they want. Fast-food restaurant customers want fast. “So to shave half a second off speaks to efficiency,” he says.
Even more intriguing for CFOs is the potential knowledge to be gained from mobile-payment services.
Several mobile-payment apps provide data and analytics to the merchant that were heretofore owned solely by the credit-card company. Because the customer has to enter his or her gender, age, and zip code to download and use the app, the app company can provide merchants with a head start on marketing and product planning if they’re attempting to target a specific age, gender, or geographic group. And the app can provide this information to a business without it having to make expensive investments in data mining, analytics, and data-collection tools, thereby leveling the field for smaller businesses such as Boloco.
“If you don’t already have loyalty programs and business analytics, there’s certainly an advantage [to the business],” says Forrester senior analyst Denee Carrington. “Some of the apps can tell you which customer has what favorite food. Linking inventory to the customer is a cool component that creates value for the merchant.”
What CFOs Should Be Doing
Mobile-payment usage is not anywhere close to matching credit and debit cards. After all, only about 50% of Americans even own smartphones, according to the Pew Institute, as opposed to the 51% who possess at least two credit cards — but that might not be true in the next three to four years, says Carrington. Mobile-payment technologies, in fact, could disrupt the credit-card industry. “LevelUp, Square, and others are playing the role of credit-card processor,” she says. “For each transaction that would have been on a standard credit card, that’s lost revenue for the card company.”
Mobile payment, believes Carrington, is “going to grow and it’s going to grow quickly.” Businesses should capitalize on that.
“CFOs should be experimenting,” she says. “Test and learn: that’s how businesses are going to find out what works. See if by spending a little on marketing and coupon offers you can get a response. You can’t make up for the earnings your competitors are getting with what you don’t have.”
And the ones who are experimenting?
“They’ll be that much smarter when the next thing comes out,” says Carrington.
Luca describes mobile payment as the biggest innovation since the debit card. And while it may be messy for a few years as the major players — Google, the big credit-card companies, and the start-ups that either succeed or are acquired by bigger fish — duke it out for market share, analysts believe that merchants without the capability to accept mobile payments will be left behind.