Are Mobile Payments Driving a Revolution for Consumers?

December 3, 2015         By: Mike Dautner

By Marcus Rothaar, Senior Research Analyst, Raddon Financial Group

Last September, the launch of Apple Pay™ generated a tremendous amount of buzz and excitement for the financial services industry and retailers alike. At that time, Apple® CEO Tim Cook suggested Apple Pay will replace the “fairly antiquated payment process” and “forever change the way all of us buy things,” as the new mobile payment service revolutionizes the consumer payment experience.

While those objectives are certainly ambitious, they cannot be dismissed – especially when coming from the leader of an innovative technology company that has a strong record of successfully launching new products and services to consumers.

Now, nearly one year since the launch of Apple Pay, Android Pay is set to make a similar splash in mobile payments, while bringing additional competition and innovation to the market. At the end of the day, this is a very positive development for consumers.

Each spring and fall, Raddon Financial Group conducts research to examine a plethora of consumer-driven commercial activities, including mobile payments. The most recent surveys suggest that Apple Pay has certainly influenced mobile payment adoption among consumers. For example, 7 percent of U.S. consumers have conducted an in-store mobile payment – a 3 percent increase since 2014. Millennials, unsurprisingly have led the way in mobile payment adoption, with 15 percent saying they use mobile payments for retail point-of-sale purchases; the introduction of Android Pay will likely drive these adoption rates higher in the months and years ahead.

In terms of the retail venues that are helping to drive the mobile payment shift, Raddon finds that in-store mobile payments are not just limited to major coffee shops, such as Starbucks and Dunkin’ Donuts. While these two competitors have certainly leveraged mobile payments to their advantage, the statistics tell us something more: of the 4 percent of consumers that made point-of-sale mobile payments in March 2014, a staggering 74 percent did so to purchase coffee, tea or snacks. Much of this success can be attributed to the fact that coffee retailers have tied rewards programs to their mobile apps.

The coffee shop rewards programs allow customers to allocate money for use via the retailer’s mobile apps, and as with all mobile payments, to complete the purchase. Customers simply pull up a QR code on their mobile phones and swipe it at the cash register. As this happens, they also earn points that count toward a free cup of coffee or other purchases at the store. This is a fantastic way of generating loyalty while also paving the way to people’s heart through perks and incentives that culminate in one of the latest and greatest places of all – the mobile wallet.

Since 2014, the breadth and depth of mobile purchases have also expanded beyond coffee, tea and confections; indeed, retail mobile payments now encompass a larger share of the payments consumers make in supermarkets, department stores, convenience stores – and even gas pumps. It is quite evident that as the universe of mobile payments grows, consumers are spreading their wings to fly towards other merchants that support the innovation and ease of this new technology.
Another fascinating aspect of mobile payments is found in the types of purchases that are made by smartphone types. Of the 59 percent of U.S. consumers that own a smartphone, about 10 percent own an iPhone 6 – yet, when looking exclusively at iPhone 6 owners, we also know that nearly one-third have made an in-store mobile payment. Interestingly, when this statistic is compared with previous iPhone versions – or those without Apple Pay capabilities – only 10 percent of owners have made an in-store mobile payment.

What this data suggests is that Apple Pay has moved the needle on customer awareness and the popularity of mobile payments. At the same time, it also raises a number of key questions for consideration:

  • Will consumers continue to use Apple Pay and other mobile payment options once the novelty wears off?
  • How will Android Pay change the landscape for mobile payments – and will this benefit both consumers and retailers?
  • For those who have made an in-store purchase with their phone, was the experience better than other payment options?
  • What is their incentive to replace their previous way of paying for things? Was it faster, easier and more secure than swiping a credit or debit card?
  • Are they swayed by the notion of tokenization and the idea that a merchant would never have their card information to put them at risk of a data breach?
  • In short, will they use Apple Pay or Android Pay again?

Although mobile payments may offer card issuers a lucrative channel to ensure consumer usage, those offering integration with Apple Pay need to keep the previously cited metrics on mobile payment penetration in mind. While 30 percent of iPhone 6 users are making in-store mobile payments, this figure actually represents less than 2 percent of the entire U.S. population of approximately 320 million people.

This means that all card issuers and financial institutions need to look above and beyond mobile payments – and they can do so through the mobile wallet, which offers an extended value and data source to leverage for targeted offers to consumers. Furthermore, the value of perception cannot be understated, as financial institutions that do not adapt to new technology run the high risk of becoming irrelevant to consumers – particularly Millennials.

In the end, the success of Apple Pay, Android Pay and mobile payments will be decided by consumers. Technology providers may want a payments revolution, but at the present time, the more prudent term to categorize the shifting payment infrastructure is evolution. Consumers will always demand variety and the ability to choose how they wish to pay for everyday purchases. Those retailers that offer the right blend of traditional and mobile payments options are most likely to ensure their customers’ satisfaction.