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December 17, 2012

The Harris Poll released last week on the American consumer’s perception of the use of smartphones for digital wallets summed up the picture pretty much this way: great idea, but not right now. In case you missed it (or need to be refreshed), here are the highlights.

Sixty-six percent of Americans say that they believe phones will replace plastic card payments and 61 percent say that they will replace cash. For smartphone users, those numbers are 76 percent and 70 percent respectively. As many smartphone users believe phones will replace plastic in less than five years as in more than five years (38 percent), with 24 percent saying that it will never happen at all. Interestingly, though, is that 30 percent of smartphone users believe that phones will never replace cash and nearly 40 percent say that it will be five-plus years for that to happen.

Of smartphone users, 40 percent have either seen someone use or have used a smartphone themselves to redeem a coupon, 35 percent have either seen someone or have paid for something themselves with a plastic card at a merchant using a “Square-type” device and 40 percent have seen someone use or have used an app themselves to trigger a purchase at a store. Seventeen percent of smartphone users say they have actually used their phone to pay for something at a store.

Of smartphone users who aren’t interested in smartphone payments, 62 percent say they see no reason to switch now, and 68 percent don’t want to store sensitive information on their phone. The percentages, interestingly, for non-smartphone users are lower at 52 percent and 51 percent respectively.

Men are more interested in this potential than women (32 percent versus 22 percent) are. But, households with kids are more interested than those without (38 percent versus 22 percent).

Not at all surprisingly, young people (Gen X and Millennial) are more interested than their parents and grandparents (64 percent versus 25 percent). These findings coincide with a discussion (which turned into a debate) I had with someone earlier in the week about the very same topic. His point of view was sort of a “wallets schmallets” reaction to the notion of digital wallets since his view is that payments in the US aren’t broken, digital wallet providers are targeting online transactions, which isn’t where the volume bang for the buck is happening now and online/offline convergence is nothing more than a buzzword, so who really cares?

I bet you can’t wait for my reaction.

On the wallets/schmallets front, I think that the fact that 17 percent of survey respondents have actually used their phones in stores to pay for something - not used it to shop online - is actually pretty interesting. It’s needle-in-a-haystack time when trying to find accurate stats on the use of phones to pay in physical stores since, um, there aren’t many places where anyone can do that today. So, what happens is that when most surveys report “mobile payments” use, they mush payments done online via a mobile device into that total, which, of course, distorts what is really happening in physical stores. Even the March 2012 Fed report on mobile payments didn’t distinguish stuff bought with phones in stores versus stuff bought with phones, period. Maybe the Harris Poll will serve as the baseline for us to measure growth against going forward.

But, undeniably, 2012 was the year a lot of mobile POS experiments found their way out of Powerpoint decks and into physical retailers (LevelUp, Pay with Square) and/or scaled (e.g. Starbucks). My read on the 17 percent number reported by Harris on actual interactions in store with the phone to pay for stuff, is that—wow, that’s pretty big at this point-- consumers really are embracing phones as payment devices when given the opportunity to do. Of course my guess is most of those 17 percent were stockin’ up on their caffeine at Starbucks and pretty much think of the 1970s as the prehistoric era.

If fact, Starbucks’ billion dollars in payment volume via its mobile app through Q3 of 2012 is pretty huge too, especially since its mobile users account for only about 10 percent of its customer base (SBX reports 1 million app users/week versus 56 million customers/week). But, that 10 percent has grown from zero0 percent pretty quickly - like in less than 18 months.

Now, let’s turn to the notion that phones don’t solve a payments problem that anyone cares about. It’s true that mobile commerce must deliver a compelling value proposition to consumers and merchants if it is destined to ignite. But, I don’t think that the “if it isn’t broken don’t fix it” mantra about payments is the right way to think about it. If Apple had taken the view that phones had to be broken before inventing the iPhone, well, enough said. Jobs, and many innovators, are driven by the notion that consumers only know what’s broken when they have an alternative presented to them that improves or transforms an existing experience.

Case in point: Uber. Calling for or hailing a taxi worked just fine for me most of the time (especially since most taxis now take credit cards) until Uber gave me an alternative to hail one online, track it and oh, yes, pay for it too via a registered account. The paying part was the last thing that drove me to Uber. Then, there’s my little local food market. Switching away from a “store account” there to LevelUp wasn’t about payment, since what could be easier at checkout than giving the cashier my account number that then got charged to my debit card? LevelUp now rewards me at my market for using my phone there. In this case, payment is the same seamless process, only now I get a few bucks extra every time I shop to offset my bill. In both of these cases, nothing about payments was broken and actually already pretty easy for the consumer (and because it isn’t broken, pretty easy for the innovator to leverage), but the smartphone app was the cherry and whipped cream on top of the payments sundae that made me want to use it.

Sure, security concerns are highlighted by Harris survey respondents as impediments to usage/adoption, as is the “heebie-jeebies” feeling that people say they have about account information stored on their phones. I think that maybe more the cause of a lack of understanding of how account information is secured and how accounts are protected against fraud (which is exactly as it is now), because mobile payments is just something new. People didn’t like using credit cards online when shopping either at first, but online commerce is exploding year after year, in part because card companies have educated consumers on how well protected they are protected in the event of fraud.

Now, the one thing that I think that the Harris Poll, my discussion/debate buddy and I agree with is the timetable for when the changeover to pay with phone happens. It’s not going to be tomorrow or even five years from now. In fact, it seems pretty safe to say that it will be a decade (and maybe even more) before the bulk of our spend takes place via the smartphone. This is because, like my buddy says, most of the big spend happens in physical stores AND on things that drive everyday spend like groceries, drug store stuff and gas - not just lattes at Starbucks. And, that is where the last mile to affect change at the point of sale is the toughest but also why it is where the race for digital wallets is being run.

But, there are three related insights that are important to consider as well.

The first is that the online/offline commerce thing isn’t just payments mumbo jumbo. Online commerce is really exploding: in fact two Tier 1 retailers are grabbing hold of the massive increases in online commerce to innovate the on/offline experience. Macy’s says that its online growth has hockey-sticked something like 40 percent while same store sales are chugging along at an anemic 5 percent. Three hundred stores will be converted into distribution centers to improve delivery speed. And, I will bet you that a digital app of some kind is on its way to a Macy’s customer near you in order to open up all sorts of options like, buy a dress online in the taxi on your way to meet your hot date so that you can pick it up in the store, put it on in the dressing room and be on your merry way. Or something like that. Nordstroms is another retailer who says that they will invest $1 billion in tablets and improved point-of-sale systems to move commerce closer to the customer and has offered buy online/pickup in store for a while now. It, too, has seen online sales shoot up (35 percent each of the last three quarters). These are just two examples of how making it easy for consumers to shop online will open all sorts of opportunities to parlay those digital relationships into new interactions in a physical storefront.

The second is about just what form factor and/or payment method smartphone commerce replaces and how that impacts the overall payment mix in the U.S. It is really interesting and even insightful that the Harris Poll respondents perceive that smartphones will replace plastic more so then they will replace cash. Here’s why that makes sense - and why the digital wallet race is so intense among networks and issuers.

He whose card gets attached to a mobile app/wallet first and placed into a digital wallet of some form will probably win. Think about the card you attached to your ITunes account or your Starbucks account or your PayPal account. You probably don’t. Once it’s registered, you just use it until it expires. And, most of the transactions that smartphones are (and will be) used to pay for are things that people already use a credit or debit card to pay for now. The Starbucks app targeted people who already used its gift card (of course it wants to convert others who don’t), Uber is in many cities where cabs take cards now, and PayPal at the Home Depot isn’t exactly targeting the one out of every thousand customers who pay with cash there. Even my local market LevelUp use case targets people who either have a store account attached to a debit or credit card and/or paid with a card at checkout.

Of course, the use cases for LevelUp and even PayWithSquare are those local merchants like delis and bakeries where cash is used, but as the data supports, that category of spend accounts for a small percentage of overall spend and are where the mobile commerce switchover will take the longest. There are millions and millions of those merchants and it will take years and years to reach them all with a mobile solution.

Third is the profile of the mobile commerce adopters. Naturally, young people are more eager than older consumers to use their phones to pay in stores and everywhere in between. But, they don’t have the spending power that their Boomer parents, relatives, neighbors, and employers have. Gen X’s and Millennials control roughly $250 Billion in spending power a year - Boomers, $3.4 Trillion. And there aren’t as many youngsters as there are oldsters - declining birth rates aren’t producing as many young-uns these days. The combination of the oldsters not being as interested in changing payments behaviors (old dogs -- well most of them, at least -- don’t learn new tricks, especially when it comes to something as personal and important as financial services), fewer youngsters getting older and oldsters controlling much more of the spend, well, it’s going to take a while for the vast majority of spend to be driven by smartphone toting consumers.

So, where does this leave us?

If the digital wallet providers, all of them, take anything away from this survey and the gobs of information about mobile payments and adoption and ignition, it should be two things.

First, mobile payments are just another payments layer that will co-exist with cash, credit, debit and even check for some time to come. Smartphones are absolutely the future of payments but it’s going to take a while for consumers to jump on the bandwagon completely and for merchants to offer that experience too. And getting merchants and consumers jazzed won’t be because pay with phone just replaces the act of paying. If the failed contactless experiments taught us anything, it is that tapping and not swiping, in most cases, didn’t cut it for consumers. There has to be more, and that is where the great opportunity to use these smart devices for reinventing commerce gets exciting.

And, second, is the great paradox of payments. Everyone reading this is probably in payments or touches it in some way. And, everyone knows how long it takes to get anything to change at the physical point of sale. The fact that most consumers think it will take five or 10 years to be able to use their mobile phones to pay at stores is a good thing. You’ll need every bit of that time to actually pull it off. So, don’t wait until year eight of a 10 year time horizon to start thinking about getting your mobile commerce game plan together if you want to be one of the winners crossing the mobile commerce finish line a decade from now.



About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.

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