Last week, there were a couple of major announcements in the world of mobile payments that suggest that the battle for supremacy in the mobile payments world is heating up – and in a pretty big way. We’ll certainly hear and know lots more as the big players make their speeches and launch new products (and otherwise jockey for position) at Mobile World Congress this week.
Announcement number one was that the U.S. carriers finally raised the white flag and closed down Softcard. The rumors of Google buying Softcard’s assets were confirmed officially. Those assets, which reportedly were bought for less than 10 percent of what the carriers invested in Softcard over the last 5 years include giving Google the ability to pre-install its wallet on phones from AT&T, T-Mobile and Verizon.
Right on the heels of that announcement was the news that Google will launch an “Android Pay” API at its May I/O developer conference. “Android Pay” is separate and apart from Google Wallet, the NFC-based digital wallet that today uses a virtual prepaid MasterCard (funded by whatever cards are registered to the Google Wallet) to pay merchants. Some speculate that “Android Pay” will subsume Google Wallet over time.
Both of these announcements come on the heels of the news that Samsung bought LoopPay, which just announced the launch of “Samsung Pay” at Mobile World Congress yesterday. And collectively, these moves are being discussed and debated under the guise of who’s best positioned to wrest control of the Android ecosystem and become the counter to Apple Pay’s success in its iOS ecosystem.
In case you don’t want to wait until the end to know the answer, here’s the deal. It isn’t a slam dunk for either of them.
To understand why, it’s important to first understand what’s needed to so-call “control” the Android ecosystem. There are actually six moving parts that all need to be managed in some way to gain momentum – or ignition to use our favorite word. And those six moving parts are:
- The handset.
- The operating system.
- The banks and payments networks.
- The carriers.
- The apps store/developers ecosystem.
- The consumer.
So, you are probably thinking, “you’re missing the merchant.” Yes, but the merchant will make a decision to support one or both based on how each of these six components line up to deliver incremental value to them.
So, let’s take a look at how well positioned Google and Samsung are to “win” in the Android ecosystem by comparing and contrasting them to Apple.
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Those consumers who are looking at and downloading those apps are affluent, representing a large chunk of consumer spending. That’s largely correlated with the price of Apple’s handsets – which are pricey – and the fact that Apple’s penetration has largely been in developed markets and therefore, purchased by consumers who largely have more money to spend. Apple users drive roughly 66 percent of consumer spend, a fact that’s being validated by what we are starting to see from issuers who release stats on Apple Pay usage. Last week when Chase released its stats on the 1 million Chase cards that had been registered to Apple Pay wallets, it reported that those consumers are, in fact, a more affluent segment of its customer base.
Quite naturally, all of this gives Apple great sway over the carriers, sway that has been built contractually into their agreements with them. If you have an iPhone, you’ve probably noticed the absence of apps from your carrier – they don’t permit it. Carriers don’t get to junk up the phone like they do with Android phones with apps that are pushed onto the screen and sometimes even impossible to delete. And, Apple with its control of the handset and operating system can keep it that way.
When it comes to payments, Apple Pay has embraced the payments ecosystem in an effort to make card provisioning and activation slick and seamless by leveraging the Passbook integration that, among other things, pushes notifications to the lock screen when transactions are made. Tokenized accounts numbers and secure elements also make the management of compromised cards efficient and less costly for issuers to replace.
Net-net, Apple’s command of the ecosystem is made much easier because, well, it IS the ecosystem. It is the OEM and the operating system owner. And, while it has seeded an ecosystem that has enabled 1.4 million apps to flourish – among them, many payments apps and apps with payments in them – its sizeable share and attractive consumer audience makes it possible for them to have it their way with their payments app. It’s why issuers are paying 15 bps on each transaction and why merchants, once loathe to NFC technology that tied them even closer to the payments networks – are giving it another look-see.
So here’s the good news.
Recent statistics from IDC report that Android has an 81.5 percent share of the global market with its operating system running on 1.1 billion handsets in 2014. That’s up from 2013.
Here’s the bad news. That’s across multiple versions of the Android operating system. And in the hands of consumers that don’t drive the volume of consumer spend that Apple commands, particularly since its dominance is in developing markets where consumers lack real spending power. And a lot of those Android phones aren’t really even smart phone – they’re feature ephones where the handset manufacturer found that a free Android was a convenient operating systems to use. And at a point in time, that Apple appears to be gaining momentum. In the U.S. for example, Kantar reports that the sale of Apple and Android devices in the U.S. are nearly neck and neck – 47.7 and 47.6 percent respectively – for the first time ever.
Android’s fragmentation problem has been the bane of Android’s – and Google’s mobile– existence ever since it was created. Yes, as an open source system loosely controlled by Google, it got distribution very quickly. But the double edge to that model has made it very difficult for developers to hit a critical mass of users. For instance, just 1.4 percent of devices are running Lollipop, Android’s latest version; a total of five older versions run the remaining 98.4 percent. KitKat, the version of Android prior to Lollipop doesn’t even reach a 40 percent of devices. That point is underscored when looking at the developer revenue that Google paid out in 2014 – $7 billion as compared to Apple’s $10 billion – and 64 percent of Android developers make less than $500 a month from the sale of its apps (Apple’s stat is 50 percent). It’s hard to attract good developers with great apps if they can’t reach enough consumers to make it worth their while.
That also makes Google’s attempt to control Android, never mind gain a critical mass of users with Android Pay or Google Wallet, a bit of an uphill battle at the very same time that Apple is gaining traction. Of course, Google is trying to force control of Android in a couple of different ways – saying that it won’t support versions earlier than KitKat with security upgrades for example, which they hope will force users to upgrade (Android users are targeted by 99 percent of all malware), and pushing out Android Pay and Google Wallet on newer phones thanks to now having a deal in place with the mobile operators post its Softcard acquisition.
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Yes, buying Softcard assets now means that those particular U.S. carriers will no longer block Google Wallet or whatever Android Pay looks like as a competing scheme.
But that doesn’t necessarily translate into ignition for either digital payments play – Android Pay or Google Wallet. Getting distribution is still a function of the degree to which apps, and in this case, the payments app, have been developed to maximize the features and function of the latest OS and can reach people that have it. It’s no accident that every app with payments capabilities as the primary feature and function (think PayPal, LevelUp) – as well as any app that has payments embedded in it (think Uber) has always started on iOS and then moved to Android months and sometimes even a year later. The payoff in the Android ecosystem just isn’t strong enough to make it an initial starting point.
The fragmented nature of Android will come back to haunt Google too as it tries to get banks on board and the merchants to give it another look. I’m not saying they won’t, it’s just a function of what either has to do in order to support it. If it’s a lot, neither will prioritize it until and unless they can see enough consumers wanting to use it. And that’s a problem for Google Wallet, despite the vote of confidence that Apple has given NFC. Merchant terminals still have to be enabled and handsets have to be enabled, too. The intersection of consumers with NFC-enabled handsets, running the latest version of the Android operating system with Google Wallet is a very, very small subset of consumers and an even smaller percentage of spend – and probably not significant enough to get merchants to move first.
So, the Google story, is just about the polar opposite of what you just read about Apple, and a happy ending made less certain since Google is going to duke it out in an already fragmented ecosystem with Samsung, who controls an asset that Google doesn’t – the handset – and now a payments platform that works in most merchant locations today.
Speaking of Samsung, Samsung is a consumer electronics player that derives the bulk of its operating profit from mobile devices. That’s why the recent news of its plummeting market share has been such a bummer for them, and put so much pressure on a successful release of the Galaxy S6, which was unveiled yesterday.
In 2014, Samsung saw its global smartphone market share slip nearly 5 percent and to below 30 percent (28 percent is what Strategy Analytics reports). While it remained the top OEM of Android-powered phones, IDC reports that its volumes in 2014 remained flat and that of challengers Huawei, Lenovo, LG and Xiaomi grew, particularly in developing markets which were once Samsung’s domain. Further fanning the flames of that fire, analysts report that globally, Samsung tied with Apple for the top spot in Q4 of 2014 for the first time ever – something that even a year ago, no one ever thought possible. Of course, all of this is happening at the same time that Samsung has had to pump more and more money into marketing costs to get consumers interested in buying their products.
In 2013, Samsung also launched its own version of Android, Tizen. Many say that Tizen is an OS intended to give Samsung an asset base that looks more like Apple – an OEM with control of an ecosystem that could give it a wide berth to dictate what carriers and other ecosystem players can and will do on its platform. It’s gotten just about nowhere on smartphones. And that has made it very hard for developers to get excited about developing for it.
Yet, analysts predict that Tizen is bigger than just phones and is intended to give Samsung an advantage in the Internet of Things arena and in particular, with its Smart Home initiative that could start to tie appliances and televisions around an operating system that it can control and use to attract developers.
When it comes to consumers and consumer spending, Samsung had a slight advantage when it was the only smartphone with a larger screen. More affluent consumers sought it out as an alternative to the iPhone. That edge has been blunted ever thanks to the release of Apple’s iPhone 6 Plus. Samsung’s pinning its hopes on a brand-spanking new Galaxy S6 with cool new features that can capture the recalcitrant iPhone 5 consumers who are looking for an upgrade.
And, who they can now payment enable with Samsung Pay.
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The one, of course, being the Samsung Galaxy S6.
And if Samsung is able to generate that momentum, it will enable Samsung to build more interest from developers who will want to enhance the experience of Samsung Pay beyond just payments – which is all that Apple Pay can do today – to payments wrapped around a commerce experience. This is likely to include merchant-centric experiences that include the use of their private label cards given their relationship with Synchrony which is a private label card issuer. And just yesterday, Visa and MasterCard came out in support of Samsung Pay which is also said to embrace its network tokenization scheme when it launches this summer. That implies that their issuers will follow suit and make provisioning of the cards on the phones as simple and seamless as exist in the Apple Pay world.
All that said, a few questions remain.
Samsung, of course, has a strong interest in wanting to be a dominant – the dominant, I should say – digital wallet in the Android ecosystem. And, as an OEM, Samsung does have the ability to influence what gets on their phones. But now that Google has acquired the assets of Softcard and has “control” of the operator relationships, it will be interesting to see how the competition/collaboration dichotomy gets sorted and whether that interferes at all with Samsung’s ability to get Samsung Pay on phones. Given the public support of Visa and MasterCard now, that would seem suicidal, but these are the same carriers that spent $1 billion on Softcard and kept rearranging the deck chairs on the S.S. Softcard for five years.
But in the “ecosystems make strange bedfellows category,” fierce competitors are also customers. For example, it was reported earlier this year that Samsung will provide Apple with A9 chips that will power the processing and memory functions of its iPhones and iPads. And, when I spoke with LoopPay Co-Founder Will Graylin after the announcement of its acquisition, I asked him whether a sale to Samsung was too limiting, suggesting that it had taken LoopPay out of the running as a cross-OS platform digital wallet play. Graylin remarked that Samsung has a history and a reputation of licensing its assets to a variety of players and hinted not to count anything out. So we’ll have to wait and see if and how LoopPay’s technology is distributed across other OEMs in the future.
The wildcard though is how consumers get motivated to provision their Samsung Pay wallets and are persuaded to use them. Apple Pay has spent zero dollars on marketing and promotion, and has instead relied on the issuers to do massive television advertising to get consumers to load up their wallets and use them. So far, very few consumers have.
So, since Samsung Pay has the merchant acceptance advantage sewn up, will that make a difference? That depends on what merchants really have to do to enable it at their points of sale, like telling their cashiers not to worry when customers wave their phones at mag stripe terminals or trying to figure out how to use the phone to pay at a terminal that isn’t customer facing (does the consumer have to hand the phone to a cashier?). And if the merchant has to do something different, Samsung and Samsung Pay will run into the Apple Pay buzz saw given the (PR at least) momentum that Apple Pay has and the consumer spending that their platform delivers. What is yet to be known is the extent to which a “Samsung” branded consumer wallet will create consumer interest and momentum.
So where does that leave us? The chart below summarizes where Apple, Google, and Samsung sit with respect to the assets that they have and the degree to which they control each matters for payments.
Mobile Ecosystem| Who Controls What And How Much
Source: PYMNTS.com March 2015
|Asset||Apple and Apple Pay||Google and Google Wallet/Android Pay||Samsung and Samsung Pay|
|Handset||Total control||Can influence||Controls their Phone|
|OS||Total control||Strong influence – trying to make influence stronger||Can influence on their phone and on their own version of the Android OS|
|Banks/Payment Networks||Working in collaboration with Payment Networks and Issuers||Not clear||Working in collaboration with payment networks, not yet known which issuers aside from Synchrony|
|Carriers||Can and does control thru contractual relationships||Some control/influence with Softcard assets||Not clear|
|Apps Store/Developers||Total control including the iTunes store||Limited control with one of several stores, including Google Play||Nothing – no control over any significant apps except for those it puts on its phone.|
|Consumers||Devoted and loyal affluent consumer base with payments momentum building still low usage||Unclear how much of a following Google Wallet has attracted||Samsung has a strong consumer base but not clear how consumers will react to a “Samsung” branded wallet|
As I said about 3,000 words ago, it’s anything but a slam dunk for anyone now – and that even includes Apple. Each has assets that it can directly influence and control, but no one has control of all of them and the two assets that are critical to ignition – consumer and merchant adoption.
And, merchants will support what consumers want to use.
Samsung Pay works at all merchant terminals that accept mag stripe cards, but needs consumers to buy a new phone and then want to use (and provision) a wallet called Samsung Pay instead of their leather ones. And, again, merchants still need to buy into consumers waving their phones at mag stripe terminals. There’s no guarantee most or all will very quickly.
Apple also needs consumers to buy new phones (which they have been doing in droves) and has consumer brand devotion but limitations on the number of merchants that consumers can use Apple Pay for purchasing. Consumers have to get into the habit of using mobile phones to pay enough times to keep wanting to do it regularly. Being able to use their iPhones every now and then makes it too much of a pain to use at all, after the initial euphoria wears off. It’s just as easy to stick a thin, old-fashioned card in your jacket pocket and pull it out to pay.
Google is the one that seems a bit stuck in the middle – no OEM relationships or critical mass of an operating system to influence one. And, the one OEM that has the greatest penetration of Android just launched its own digital wallet. And the other OEM with the hockey-sticking sales and a lion’s share of consumer spend isn’t probably going to be too excited about a Google Wallet app showing up on its phone, even though they now have carrier relationships to force a download. Remember when Mike Abbot, the former Softcard CEO, said in November that Softcard was going to work with Apple? Nothing ever came of that and it is likely that nothing ever will. AT&T doesn’t even have a customer service app on the Apple phone so that notion that it is going to push through a Google Wallet app seems implausible. All this suggests that Google will have to take a very different approach to getting adoption of its Wallet or Android Pay proposition.
And, each will have to compete with the mobile/digital apps that are totally independent of handsets and operating systems and have large consumer bases. PayPal, Alipay, Amazon, Visa Checkout, not to mention all of the merchant-branded apps that are embedding these apps and others to make in app and online checkout easy and seamless. And, as we see more and more evidence of the blurring of online and offline commerce, having handsets that need to physically interact with terminals to enable a transaction is less and less likely the way we transact, even if we are standing inside of a physical store. And the payments networks, as we have seen with their announcements of their support of Samsung Pay, are going to bet on all of them.
Just another day in payments.