It’s lunchtime in Boston’s financial district and the line at Boloco, a 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 account, and the man goes off to pick up his burrito. The transaction takes five seconds. The next customer steps up, phone poised.
Scenes like this are becoming increasingly common as people integrate their smartphones 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. In a recent Forrester survey of nearly 7,600 U.S. adults, 30% of mobile-phone users expressed some interest in paying by phone.
For businesses, the benefits of adopting mobile-payment technologies include speeding up transactions and potentially lowering transaction costs. Perhaps more important, accepting payments via smartphone allows businesses to collect more information about their customers to deepen their understanding of consumer buying habits. It also makes it easier for companies to implement loyalty programs that keep customers coming back.
“Data is what’s in [mobile-payment technology] for the merchant,” says PricewaterhouseCoopers principal Drew Luca. “Data, and how it can be mined and leveraged and used.”
Everybody’s Selling Mobile
Currently, the mobile-payment trend is extremely consumer-focused, says Luca. Mobile-payment providers are attempting to change lifelong purchasing habits by using discounts, loyalty programs, and prizes to give people the incentive to ditch their plastic in favor of the phone.
Following in the footsteps of Starbucks’s widely adopted mobile-payment app (more than a quarter of the coffee chain’s transactions are now via mobile, says Starbucks), major players like Visa and PayPal and telecom companies such as Verizon, AT&T, and T-Mobile are all experimenting with turning phones into electronic wallets or credit cards.
Google announced in July that its Wallet app — in which select Android phones substitute for credit cards using near-field communication technology — will work at more than 20 retailers in coming months, including Macy’s, CVS, and Banana Republic. But Google’s service is currently available on only six phone models, and it offers little incentive for consumers beyond the convenience 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 charges a 2.75% payment-processing, or “swipe,” fee, compared with up to 3% for credit-card transactions.
LevelUp doesn’t charge a swipe fee. Instead, it 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 Level-Up 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.
Faster and Smarter
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. Fast-food restaurant customers want fast, “so to shave half a second off speaks to efficiency,” says Luca.
If customers gain in convenience from mobile-payment apps, companies gain in potential knowledge. Several apps provide data and analytics to the merchant that were previously owned solely by credit-card companies. 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 are 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 playing 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.”
Mobile-payment usage is not anywhere close to matching that for credit and debit cards. After all, only 46% of Americans even own smartphones, according to the Pew Institute, compared with 68% who possess at least one credit card, according to the 2010 Federal Reserve Board Survey of Consumer Finances. But that might change in the next three to four years, says Carrington. Indeed, mobile-payment technologies 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.”
Since Boloco implemented LevelUp in its restaurants in April, the $20 million (in revenues) privately held chain has seen its mobile payments increase to 4% of its overall transactions, says CFO Patrick Renna. “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,” he says.
Mobile payment, says Carrington, is “going to grow, and it’s going to grow quickly.” Businesses should capitalize on that, she says. “CFOs should be experimenting. 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.” Companies that are experimenting will be ahead of the game when the next mobile-payment application comes out, she adds.
Luca calls mobile payment the biggest innovation since the debit card. And while it may be messy for a few years as the major providers duke it out for market share, analysts believe that merchants without the capability to accept mobile payments will be left behind.