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Why mobile wallet companies are pushing plastic cards

This year, three U.S. mobile payments companies have released consumer “debit cards,” a tacit admission of how behind the industry is on mobile payments — and a smart marketing ploy that extends payment providers’ own brands.

In May Square revealed the Square Cash Card, which links to users’ Square Cash app accounts and lets them use the funds they hold there, but doesn’t link to their bank accounts. The following month, Apple introduced Apple Pay Cash, its card that people can use to make Apple Pay purchases online or in physical stores with the funds they receive through Apple’s new money-transfer service. That month Venmo said it was also testing a debit card, which became available last week. The money users spend is debited from their Venmo balance.

It’s ironic, and the offerings sound complex (consumers really just want quick and painless transactions). For the immediate business, this is just a way to extend their initial, virtual value propositions and give customers more flexibility in how they use their apps. But it’s also an acknowledgement that mobile payments are still a pretty futuristic concept for consumers, and an opportunity to challenge how those consumers think about financial services.

“The play is: how does a consumer think about who they bank with?” said Mike Landau, payments research lead at PwC. “I would say the bank where I have my account, where my money sits. When you challenge the idea of where your money should sit so it’s most convenient for consumers — the thesis here is that that answer can evolve based on habit.”

Square Cash, Apple Pay and Venmo currently all have a peer-to-peer payments solution that come back to a bank account for each transaction.

“At a certain point the service becomes habitual to consumers to the point that they really start to move money from that funded account and it makes more sense to run their financial lives out of a digital service as opposed to a traditional bank,” Landau said.

In just the month after Square Cash launched its card it shipped as many units as it did in the first eight months of the original Square Reader, CEO Jack Dorsey and CFO Sarah Friar wrote in their second quarter shareholder letter this year. In the second quarter, more than a third of active Square Cash customers conducted fee-based transactions, which they identify as including Cash Card, credit card, Instant Deposit and Square Cash for Business transactions. The company has not disclosed its number of active users, a spokesman said.

The shift is similar to PayPal’s experience five years ago, Mike Moeser, Javelin Strategy’s payments director, recalled. At the time, PayPal began issuing plastic cards as part of an effort to get merchant customers to adopt POS devices and thereby extend their initial e-commerce offering into brick-and-mortar stores. Today still, despite the digital overhaul across industries, a physical store presence is still a huge priority for companies trying to capture transactions, he said.

“The reason e-commerce oriented companies such as Square, Venmo and Apple are issuing plastic is the reality that only 10 percent of total retail sales reside in the e-commerce,” Moeser said. “The remaining 90 percent of purchases are still made at physical stores. While e-commerce takes 50 to 75 basis points of share every year, it’s not fast enough for some of these e-commerce players.”

PayPal found success with just a handful of merchants. Its cards didn’t have a Visa or Mastercard logo, which meant they had to adopt another network to accept the cards. Most retailers weren’t willing.

To drive hyper-growth in purchase volume, companies have two options, Moeser said: fight with their competitors for customer transactions, or bring their digital offerings into the physical world and bring the functionality of point-of-sale retail to digital wallets.

“What’s different this time around is that folks like Venmo,” which is owned by PayPal, “are using traditional card networks such as Visa to extend their wallets into the physical world,” he said. “This means the $20 someone sends you by Venmo for a dinner can be used at a later time in a physical store – you don’t need to go to their website.

Image: A Sneak Peek Into The Unreleased #CASHCARD
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Why Apple Pay won’t (and doesn’t need to) be a Venmo-killer

Apple revealed Monday that users of its iPhone devices can now pay their friends (or whoever) through a money transfer service that operates over the iMessage app. It’s obviously a competitor to Venmo, the popular peer-to-peer payments app, but a killer? Probably not, according to analysts in the space.

Firstly, the value proposition is for users of Apple devices, and Venmo users are more diverse than that. Industry observers say people lose sight of the reality that the story of financial technology has a lot to do with creating customer-centric offerings — and customers aren’t all on Apple devices. Android took the majority (82 percent) of the market in the fourth quarter of 2016; Apple captured 18 percent.

“It’s not the p-to-p that gets me so excited, it’s where they’re enabling commerce that’s not happening today: web and app,” said David Sica, a principal at venture capital firm Nyca Partners. “Once you win that consumer it’s very easy to start building other types of payment functionalities. People aren’t using PayPal proper as much as they’re using Venmo, but Venmo doesn’t have the offerings.”

PayPal recently announced that it would soon open Venmo to businesses, so while it’s expanding its one functionality to others, Apple is improving its current value proposition for the customer and solving for real pain points, like the checkout process in mobile shopping experiences. (Shopping cart abandonment rate on mobile devices is about 78 percent — that’s more than three out of every four sales that retailers lose because of friction at the point of sale.)

Venmo may be the dominant force in p-to-p payments, but it’s not alone. Traditional banks are going after it too, worried (at least they should be) that Apple, Venmo, Square Cash or any of the messenger app-based payments offerings like Facebook Messenger, WhatsApp or WeChat Pay will “take a debit card that they spend $7 million a year to market and bury it in someone else’s wallet,” Sica said. The banks in the Zelle Network, the other “Venmo-killer,” processed just $55 billion in p-to-p transactions across more than 170 million transactions in 2016.

“They’re looking to steer you back to their app to send money, which is great, but it’s not a very customer centric approach,” Sica said.

As part of the announcement, Apple also introduced its own digital debit card, Apple Pay Cash, which lets users receive money through the new p-to-p transaction and use it to make Apple Pay purchases wherever and however they’re accepted. That offering could ostensibly be a gateway to mobile payments for younger customers who may not already own traditional credit and debit cards.

But the heart of the actual peer-to-peer service is so similar to all the other wannabe Venmo-killers out there, said Zilvinas Bareisis, a senior analyst at Celent. The real question is which one will be best integrated into where the customer already is.

“To some extent this is a user interface, user experience proposition,” he said. “A lot of these solutions are backed by card-to-card transfers — you’re sending from one debit card to another. If you look at Facebook Messenger and messenger payment, its basically that service integrated into Messenger. With Venmo it’s that service integrated into that app; with Zelle it’s bank-to-bank, account-to-account transfers integrated within from a mobile banking app solution. The underlying service is very similar.”

Despite being named one of the most innovative companies year after year, there’s been an ongoing discussion among the tech industry about how Apple has lost its innovation mojo, or that it’s in an innovation slump, or how innovation left with Steve Jobs.

Now, Apple is saying it’s going to have its own service within its own operating system, integrated tightly into its own process solutions, like iMessage. It’s unlikely to divert people to other messenger apps to send money.

“Folks don’t want to download more apps,” Sica said. “App download is minimal, it’s hard to win that real estate now… There’s room for companies to offer more options. For some people that’ll be perfect for them.”

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Chinese social payments apps enter US market

Alipay has landed in the U.S. following its do-everything social payments competitor WeChat, who moved in last week, signaling the start of a payments arms race here.

Alipay, China’s dominant mobile payments company under Ant Financial, signed a deal Monday with First Data, the U.S. card processing giant, that will allow Chinese tourists in the U.S. to make purchases at its 4 million merchant locations using Alipay.

The expansion stateside follows that of Tencent Holdings’ WeChat, which announced its plans in February and arrived in the U.S. on Thursday.

“These consumers love to shop in the U.S. because they find items here they would otherwise not be able to find in China, and pricing that is much more affordable,” said Souheil Badran, president of Alipay North America. “Our focus will continue to be on enabling the Chinese consumer to use Alipay at U.S. merchants.”

Mobile payments still lag behind China, but growth is expected to top the Asian country in the next year, according to estimates.

To some degree, that makes Alipay a threat to Apple Pay, which has been ahead of its peers in monthly active users, but is leading a race people generally aren’t interested in. And its mobile payments peers, Samsung Pay and Android Pay, aren’t far behind. Many point the finger at retailers, who have been slow to get any systems and incentives in place to encourage consumers to pull out their phone instead of their cards.

By contrast, Alipay, WeChat and the concept of mobile payments is common to Chinese consumes and by now, probably pretty natural to them. China is a mobile-first country. In addition to making online shopping payments, transferring money and paying utility bills, WeChat and Alipay users can hail taxis, book hotels, buy movie tickets, make doctors’ appointments and book karaoke sessions top up their mobile phones from within the apps.

“Alipay is a lifestyle application platform offering not only payment processing but also financial services, social and commerce use cases,” Badran said. “Alipay is part of our consumers’ daily life.”

But the bigger problem for Apple is the lack of widespread consumer-to-business mobile payments uptake, not Alipay, Samsung Pay or any of it’s competitors. Bringing millions of mobile payments users — even if its Alipay that makes that happen — into millions of stores could be the push that U.S. consumers need to break old habits — taking out the plastic — and creating a new one, tapping the phone that’s probably already in hand.

CEO Tim Cook boasted numbers in the “tens of millions” with 450 percent year-over-year growth last July, the last time he spoke publicly on the subject. There are 4.5 million merchants in the Apple Pay network.

Meanwhile. Alipay boasts 450 million monthly active users, who now have access to four million merchants through First Data. There are more than four million Chinese visitors to the U.S. each year, Badran said. WeChat boats 650 million monthly daily active users.

“When First Data moves in a business it’s not an experiment,” said Ashish Bahl, CEO of Acculynk, First Data’s recently-acquired technology company that provides innovative debit routing solutions. “A lot of work has been done to make sure it works, it’s scalable and adoption is ready. Merchants are open to delivering new payment types to existing consumers and if we can get in the flow of consumer brands, whether they’re issuers or wallets, that’s really a good thing.”

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How Mastercard is applying lessons from Apple Pay to its plastic cards

Apple may have gotten people used to the idea of authenticating payments and verifying identity with their fingerprint, but that Pay product hasn’t really taken off yet. Now, Mastercard wants to bring that behavioral habit to its cards.

The credit card giant revealed Thursday that it’s testing fingerprint biometrics in cards in South Africa to help it to detect and prevent fraud, with plans to run the same trial in Europe and Asia. A future version of the card will employ contactless technology, according to Mastercard.

“Companies are looking at Apple Pay’s failure to really take off and thinking about how to improve the user experience of both mobile and existing payments systems,” said George Avetisov, CEO of biometric security company HYPR Corp.

The card works with existing chip card terminals at the point of sale. Customers just insert the chip per usual while keeping their finger or thumbprint on the embedded sensor. At least for now, customers have to go to a physical bank branch in order to obtain the card and register their fingerprint to it.

It almost seems like a step back from global mobile payments efforts – but then again, mobile payments haven’t really reached their tipping point in most regions yet, with Asia being the exception.

Mastercard’s main business may be in cards but the company has already made strides in innovating mobile payments, most notably by launching payment technology in October that lets customers verify their identity with fingerprints or selfies when shopping online.

“It’s going to take a long time for biometrics to kill the password, but there will always be some kind of use case for the password as long as it’s around,” Avetisov said. “It’s the same thing here. It’ll take a long time for mobile payments to kill credit cards, and there will be interesting use cases for plastic credit cards.”

It is unrealistic that the biometric cards will come to the U.S., since its issuers have just migrating away from magstripe cards to chip cards requiring signatures from cardholders. The point of the migration was to increase security and reduce card present fraud but many argue the switch from stripe to chip makes little difference unless cardholders can enter their pin to verify a payment, versus providing a signature.

Many merchants and retailers still haven’t implemented a year and a half after the deadline to do so. The delay stems largely from the high costs associated with the migration, and it’s likely there will be similar pushback if they’re required to implement a chip-and-pin process.

“The next logical step in EMV authentication is chip-and-pin, however, most issuers have balked at the increased cost,” said Mike Moeser, director of payments at Javelin Strategy. “Deploying a fingerprint scan on a card would be a significantly more expensive EMV deployment that likely would not be cost justified.”

Nevertheless the biometric card is a useful innovation for the security and usability of credit cards. Mastercard should expect feedback from the test on how it can work with merchants in using biometrics to defeat counterfeit card fraud at retail locations, Moeser said. It’s also a useful application in areas with poor or no Internet connection and a stronger security measure for high value or no-limit credit cards, Avetisov said.

“People need to understand it’s going to be a very long time before we kill the credit card,” he said.

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On the road to voice payments, Google and Amazon pull ahead of Apple

Google just scrapped its Hands Free pilot, a retail payments program it began testing almost a year ago that allowed people to use facial recognition technology to pay for items in-store. All they had to do was say “I’ll pay with Google.”

The road to mobile payment is riddled with the bones of past failures. Google previously stumbled with Google Wallet in 2011, the first attempt at a mobile wallet for consumers that never really took off — and was overshadowed by Apple Pay, which launched months later.

But now Google has a leg up in voice, which is probably the next shift in consumer behavior, and as a result, payments. The same is true for Amazon. Google’s Hands Free facial recognition experiment may not have caught on, but the popularity of its Home Assistant, as well as Amazon’s Alexa, is rising rapidly. Echo sales jumped 400 percent from last year, according to VoiceLabs, and both Google Home and Alexa grew their third-party developer bases more than 1500 percent.

Meanwhile, Apple is missing the voice-first boat, which is odd considering that Apple Pay, a fingerprint-enabled mobile payment service, took an early lead in the mobile payments race after Google Wallet’s flameout.

But fingerprint tech is different from voice. And even though Apple’s Siri debuted well ahead of Alexa and Google Home, in differs from them in the types of information users feel comfortable sharing with her and what they can share with Alexa or Google Home.

Here’s how the three biggest players in voice currently stand against each other in regards to voice payments:

Alexa
This week Starbucks — itself a payments pioneer disguised as a caffeine vendor — launched a beta version of its voice ordering function for iOS and Alexa users. About 1,000 users in the U.S. are testing the service. People who bank with Capital One can ask Alexa for information about their banking activity. Alexa has the greater information sharing and reading capability, for now, than its competitors.

There is an increasing number of service providers bringing Alexa integrations to enable commerce through voice. Currently, it adds a level of convenience to small purchases, like a Starbucks coffee or an Uber ride.

“I don’t think the day is on the horizon where a consumer is standing in their living room saying, ‘I want to order a 42-inch TV,’” said Michelle Evans, head of digital consumer research at Euromonitor. “I think it’ll be driven around different products or services where convenience is a factor,” like food ordering, or ride sharing services.

Google Home
Brian Roemmele, a researcher and analyst and founder of PayFinders.com, predicts that in the next two years adoption of digital assistance will accelerate as quickly if not more as the original iPhone did in its early days and smaller uses will begin to take off, like ordering food.

“We had three voice-first Super Bowl ads,” he pointed out. “One from Google and two for Alexa. People say mainstreaming is about 10 years away, I’m saying it already happened.”

It’s not clear what Google’s next move is. Now that the Hands Free pilot is over it plans on “bringing the best of the Hands Free technology to a wider audience,” it wrote in an FAQ this week. In the same week, Alphabet, Google’s parent company, warned investors in its annual report of increasing competition from “digital assistant providers, such as Apple, Amazon, Facebook and Microsoft.”

Furthermore, developers last month dug into the code that makes up the latest version of the Google Home Assistant and found some lines saying it would soon allow users to make payments directly through Google Home. Neither Google nor Amazon responded to requests for comment.

Siri
Developers have built a voice-first peer-to-peer payment capability into the latest iPhone operating system, with Square Cash and U.K. challenger bank Monzo. The next update will include voice-activated bill pay functionality, an Apple spokesperson confirmed. But because Siri requires the person’s fingerprint to authenticate and send the payment, it still feels like more of a mobile payment than a true voice payment. For example, someone might say, “Hey Siri, send John $10 using cash,” Siri would go into the Cash app to set up the payment, but then ultimately require TouchID verification to send it.

Apple’s best efforts in voice have been Siri and its new AirPods, wireless headphones made for better listening experiences and interactions with Siri. These allow people to exchange much more personal information, things customers are most likely uncomfortable disclosing to a digital assistant like Alexa or Google Home because of who might be listening in on that information, said PayFinders’ Roemmele.

Because customers tend to communicate more generalized information with Alexa and Google, Roemmele added, the two companies will need to fine tune its voice recognition and authentication capabilities to ensure when customers share private information they never feed it back when a third party is in the room.

Nevertheless, Siri as a digital assistant lags behind them. Customers feel the difference when they ask Siri particularly complex questions and she often directs them to web searches requiring they do further reading and research, instead of replying with a complete answer the way Alexa or Google would.

“Apple is missing part of the voice-first revolution because they see it as an upending to the existing operating system,” Roemmele said. “They don’t see it as a modality in and of itself and because of that they box themselves out of it.”

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Walmart Pay and the overcrowding of the mobile payment market

The release of Walmart Pay, Walmart’s new mobile payment service, on May 16th came as something of a shock to the retail industry. Up until then, Walmart had been working with other major retailers in the US – under the umbrella organization MCX – to create CurrentC, an alternative mobile payment service that was supposed to enable retailers to avoid credit cards fees and to have direct access to their customers’ shopping data.

A number of news sources have documented the drama behind Walmart’s decision to go solo and analyzed the problems leading up to CurrentC’s apparent demise. Allen Weinberg, a partner at Glenbrook Partners, a payment strategy consulting firm based in San Francisco, CA., cautioned Tradestreaming that it’s premature to mourn MCX or CurrentC, given that Walmart has not formally abandoned the initiative. Nevertheless, with MCX declaring its intention to focus on bank deals, it seems likely that many other retailers and shops will jump on the mobile payment service bandwagon by developing their own offerings.

Below, we examine how the proliferation of mobile payment services could impact the entire retail industry.

The Good

As customized mobile payment systems could become the norm at various retailers, consumers are unlikely to have the patience, inclination, or even phone storage space to download each and every mobile payment app.

This is an opportunity for retailers to strengthen their brands and their client bases by building on their existing forms of what Paul Kemp-Robertson, cofounder and editorial director of Contagious Communications, calls ‘branded currency’.

In a highly entertaining 2013 TED Talk, Kemp-Robertson posits that

“brands literally stand or fall on their reputations. And if you think about it, reputation has now become a currency. You know, reputations are built on trust, consistency, transparency. So if you’ve actually decided that you trust a brand, you want a relationship, you want to engage with the brand, you’re already kind of participating in lots of new forms of currency.”

When asked how mobile payment services will affect already existing forms of branded currency, Kemp-Robertson replied: “The trajectory of the mobile wallet trend is only going to get steeper as mass adoption starts to kick in,” he wrote Tradestreaming via email. “The brands that will benefit the most are those who move beyond mere convenience and offer tangible rewards and utility in exchange for people’s sustained loyalty. That’s why Walmart has ring-fenced its Pay system, presumably as a way of locking customers into its retail ecosystem. In other words: ‘Stay loyal and reap some exclusive, premium perks.’”

The Bad

In order to keep their customers loyal, retailers will have to become incredibly competitive. Price comparison apps like ShopSavvy already allow consumers to scan a barcode and compare prices at retailers and stores throughout the country. Walmart itself has a Savings Catcher app, which scans customers’ receipts and makes them eligible for a gift card rebate if a local competitor has the same item advertised for less.

In a scenario in which every retailer is desperate to keep customers true to it and its mobile payment platform, it seems very possible that retailers will be forced to become so competitive that they’ll start losing money on some of their sales.

The Indifferent

At present, mobile payment platforms in the US haven’t exactly taken off. According to a recent study, in the last quarter of 2015, a mere 16.6% of people tried Apple Pay after acquiring an iPhone 6/6S. The same study showed a lack of enthusiasm for the product among potential and present Apple Pay users, as 30% of people polled said forgetfulness was the reason they didn’t use the mobile payment platform when they could have, while another 30% simply didn’t realize that Apple Pay was accepted at the store they were shopping.

It’s possible that by incentivizing their clients through discounts and loyalty programs, retailers like Walmart will have more success motivating clients to use their mobile payments systems than Apple, Google, and Samsung are having with their ubiquitous payment platforms.

Even if retailers do offer these incentives, it’s still possible that consumers will rebel against the over-saturation of the mobile payment market. Peter Cohan critiqued Apple Pay in Forbes, pinpointing what would seem to be the trouble with all mobile payment systems: they are a “solution in search of a problem … But the simple reality is that credit and debit cards are not a major consumer pain point — they generally work quickly and painlessly.”

The Different

However, Glenbrook’s Weinberg suggested that there’s an implicit difference between retailer mobile payment services and ubiquitous mobile payment platforms, explaining, “I consider Walmart Pay, Target Pay, and the others to be less of an open-loop payment scheme like Apple Pay and Android Pay, and more of a way to ‘payment-enable’ those merchants’ proprietary apps, somewhat like Starbucks has.”

In other words, retailers’ mobile payment systems aren’t ‘a solution in search of a problem’ but really the next stage in the evolution of proprietary apps. If that’s the case, consumers would be likely to carry around apps from multiple retailers because each app would provide value above and beyond payments.

As more and more retailers join the mobile payment movement, it will be interesting to see just what challenges these emerging payment systems bring, and how retailers will rise to meet these challenges.

Photo credit: MikeKalasnik via VisualHunt / CC BY-SA