Mobile Payments: The TMT Perspective


M-payments offer very little benefit to consumers or merchants today. Uptake, even for the widely hyped ApplePay, is disappointing. Meanwhile, retailers, their customers saturated with loyalty cards and engagement falling, see mobile apps as a big opportunity and m-payments as an escape from onerous card fees. They are likely to be disappointed – it has become very difficult to drive app downloads and engagement. Moreover, ApplePay and AndroidPay will be default platform utilities with privileged access to consumers and serious working advantages over 3rd party solutions. MCX’s CurrentC payments product, unaligned with AAPL or GOOG, will be limited to a clumsy multi-step QR code approach as a result. Ultimately, we believe that the success of m-payments will come as they are integrated into a broader re-imagining of the consumer m-commerce experience as a frictionless piece of iOS and Android. In this, GOOG will take a much more active role, facilitating successful loyalty solutions, enhancing merchant reach, engagement and targeting, and tracking ad effectiveness through to purchase. AAPL is tightly focused on providing value for – and regulating access to – its loyal and lucrative customer base. The ongoing internet usage shift toward mobile platforms will further strengthen the importance of iOS/Android, to the detriment of m-commerce and payments solutions that choose to compete independently.

M-Payments are just a piece of M-commerce. Alone, M-payments offer little to consumers or merchants. Just 15% of eligible iPhone owners have registered for the well-hyped ApplePay and only half of those have become regular users. Why? Consumers are happy with credit cards and see no value from changing, particularly given spotty support by merchants. M-Payments have been successful only in narrow circumstances where they have been integrated into an improved customer experience – e.g. Starbucks and Uber.

Merchants lack reach, engagement and user data. Loyalty programs have been an enormous boon for several pioneers – Amazon, Target, Walgreens, etc. However, as programs multiply, card fatigue has driven consumer engagement down. Merchants are now looking to mobile, but major obstacles loom. Their data on customers is limited – name, email, address, phone number and their purchasing record with that specific retailer. Merchants lack the wherewithal to find their customers outside the store, much less to engage them.

SBUX is the exception, not the rule. SBUX successful mobile app was early to market, addressed a pain point for customers (waiting in line), and leveraged unusually high visit frequency by a tech savvy, young customer base. While there may be analogs to SBUX, particularly amongst other fast casual restaurants, the large majority of retail merchants cannot pitch significant experience benefits to their customers and will rely on loyalty discounts entirely analogous to their existing card-based programs.

Mobile apps are no panacea. The average smartphone user opens just 26 apps in a given month, including default apps like search, maps, calendar and messaging. Only 1/3rd of users download even a single app in any month, and 80% of downloaded apps are used once and discarded. App notifications have become the new spam, and both AAPL and GOOG are adding tools to help filter them. Moreover, the platform owners place restrictions on apps – MCX’s CurrentC payments solution will not be allowed to use NFC on iPhones, and will rely, instead, on a clumsy multistep checkout using QR codes downloaded to a store app on the customer’s phone.

AAPL and GOOG are essential for m-commerce. Merchants, advertisers, and 3rd party payments platforms cannot access mobile consumers without going through GOOG and AAPL. With the power to set default apps, proprietary access to user data, and control over 3rd party apps (distribution, notifications, in-app purchases, etc.), the platform owners can give technical advantages to their preferred solutions and stymie alternatives. We note that m-payment rules set by V and MA will block platforms from taking transaction fees or collecting transaction data in the future, blunting direct value capture by AAPL and GOOG, but expect that a “device present” rate comparable to “card present” is forthcoming, giving the platforms a significant cost advantage for payments made from mobile devices.

AAPL is content to play gatekeeper. AAPL’s device centered strategy relies on maintaining strict control of the user experience, weaving differentiated functionality into integrated hardware and software solutions. As such, it has banned alternative payment solutions from using the radios or the biometric authentication on its devices, relegating 3rd parties, like MCX, to web-based solutions. Meanwhile, ApplePay is required for in-app purchases and will likely be integrated into the Safari browser as well. We believe that the 15bp fee negotiated with banks will sunset, and that the primary benefit of m-commerce to AAPL will be in further cementing customer loyalty, and charging merchants fees for adding loyalty programs to ApplePay.

GOOG wants to orchestrate m-commerce. GOOG hopes to partner with merchants and brands to drive m-commerce forward. Loyalty programs can be greatly enhanced with GOOG’s ability to authenticate customer identity, provide deep, actionable interest and behavioral data, and target high potential would-be members. At the same time, linking with merchants would give GOOG means to track advertising all of the way to purchase. Moreover, GOOG means to provide further support to brick-and-mortar merchants on line – one-click shopping, contextual push advertising tied to time, location and activity, even same day delivery service. With 4,000 Googlers tasked with selling merchants and helping them implement solutions, we see GOOG as a force in the future of m-commerce.

Concerned for PayPal. The strength of AAPL and GOOG is a considerable threat to PayPal’s bread-and-butter on-line payments business as internet usage continues its shift to mobile platforms, particularly if the two platforms are granted advantageous “device present” rates. We are more bullish on the potential for the EBAY parent, particularly as an M&A target for companies, such as BABA and GOOG, looking to gain scale in e-commerce.

M-commerce transition good for web-scale players. Amazon is well positioned for m-commerce with its outstanding cost, reach and engagement. FB, TWTR and Pinterest are looking to implement one-click “buy” buttons – we believe these will gain good traction with time. We also see upside for web companies, like GRUB and PCLN’s OpenTable, which facilitate m-commerce for merchants.

Please see our published research page for the full note.

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