Dave Banks thought his company’s mobile-payment push would reach its first milestone of 100,000 users in six, maybe nine months.
It took one.
In just 30 days, the 600-store Cumberland Farms chain hit its initial user goal, and in subsequent months turned mobile into 10% of its total payment mix (200,000 users). Now the company is pushing digital coupons to reward loyal gasoline customers and motivate them to come in from the gas islands. It’s also planning to launch a new program designed specifically for businesses in the very near future.
“You can take control of your destiny,” says Banks, CIO for Cumberland Gulf Group, Framingham, Mass., “[because] so many people have smartphones.”
For retailers in the brick-and-mortar game, success with mobile payment may spark an unprecedented chain reaction, one that could completely remap the supply chain, level iconic brands and usher in yet-unheard-of ways of shopping that will thrill and energize even the most passive consumer.
Just how and when the traditional shopping experience will undergo this seismic shift is unclear. Successes such as Cumberland Farms’ occur in fits and starts, with more high-profile mobile wallets from the likes of PayPal, Google and Isis seemingly stalled.
But make no mistake: Major players including credit-card companies, phone carriers and the nation’s most influential retailers are leveraging all they have for their piece of this murky pie.
What is certain, as Banks has seen, is that the consumer appetite is there. It’s obvious that the average Joe or Jane wishes to use a cellphone to pay for goods, organize loyalty rewards and even initiate a more secure credit transaction. For the retailer, the Holy Grail of shopper insight and customer “stickiness” alone presents the most compelling of motives.
But so much stands in the way.
The major players involved have divergent agendas. Battles rage over ownership of what many call the “secure element,” or the piece of the payment transaction that verifies a person’s identity. Central to that conflict is the ownership of data and consumer buying history, by any measure the holiest of turf. Retailers, including some of the country’s largest names, have even banded together to create their own mobile-wallet solution as a way to hold onto that data.
These battles affect the viability of technologies, pitting near-field communications (NFC) against on-screen barcodes against snapshots of quick-response (QR) codes. And threats of data-breach liability and security mandates lay like cost-punitive land mines at retailers’ feet.
Then there’s the consumer—by all accounts, both the hot sauce and the wild card.
A recently released study by New York-based Deloitte points to a level of demand that far outpaces supply-chain readiness. In that study, executives from major consumer packaged goods (CPG) companies expected a 35% growth in consumer purchasing via online methods in the next year and 76% growth in three years. In contrast, consumers responding to the survey said they expect their online purchases to increase by 67% in the next year and 158% in three years. (For more on the study, see infographic.)
Now weave in concerns about identity theft in the wake of last fall’s Target breach involving 110 million cardholders. It would seem that customers across all channels want more secure ways to pay, especially as their transactions migrate online. Mobile holds such promise.
So what’s holding up the mobile-wallet avalanche?
In short, the public wants more than the flash of technology to change its mag-stripe way of life.
Cumberland Farms’ success comes amid industry confusion over the many mobile wallets that have emerged. Cumberland actually started out using San Jose, Calif.-based PayPal. After it was launched in March 2012 at 50 Boston-area stores, initial response was good enough that the company extended the offer to all 200 of its stores in Massachusetts after three months.
Granted, little effort went into advertising, but all in all the usage hit only 1% to 2% of the test stores’ payment mix. “The Cumberland-PayPal launch attracted a lot of attention in the tech and industry media,” Banks says. “But it didn’t have the interchange savings and resulting gasoline discounts to gain widespread consumer adoption.”
After evaluating the project, Cumberland came back with an automated clearinghouse (ACH)-based solution, which ties mobile payments to customers’ bank accounts. Cumberland Farms partnered with Coconut Creek, Fla.-based National Payment Card to develop an industry-first, fully integrated mobile-payment product based on ACH transfers. The solution bypasses traditional credit-card rails and avoids high interchange fees, with the resulting savings allowing for the much-desired 10-cent discount.
Whether PayPal will factor in down the road remains a question, but Banks believes the company has hit on a winning formula.
To embrace mobile wallets, customers want a sizable discount first—that alluring hook—and convenience second, says Banks. The chain’s survey reinforced this message, with two-thirds of mobile-paying customers acknowledging the 10-cent discount hooked them to sign up and use the option, with about a third saying convenient payment method was the top motivation.
The one-two punch appears critical in driving consumer behavior. “People are getting more comfortable paying by using [mobile] phones in general,” he says. “But they’re really looking to save money on gas.”
Retailers’ desire to jump into mobile is palpable, with many initiating loyalty and applications (apps) offering reward points, location finders, pricing information and notifications of in-store specials. Some have followed Cumberland’s example and have taken on mobile payment, including Flash Foods, Waycross, Ga.; Maverik, North Salt Lake, Utah; Parker Cos., Savannah, Ga.; and Spinx Cos., Greenville, S.C.
In most of these cases, mobile payment goes hand in hand with passed-along fuel discounts, something that may not continue in the long term, according to Gray Taylor, executive director of NACS’ technology arm, the Petroleum Convenience Alliance for Technology Standards (PCATS), Alexandria, Va.
Though not completely in effect today, victories that accompanied the Durbin Amendment, enacted last year, will eventually level the financial advantages that going through ACH processing provides. However, Taylor says, that doesn’t negate the effort, referring to the audience these retailers would have accrued being first movers in their markets.
“If and when the pricing cues go away, then it’s about the number of eyeballs you have,” Taylor says. “At that point, they’ll need to come up with a different value proposition. But if they succeed, they’ll have the ability to keep customers on their mobile platforms.”
The cross-channel retailer that has best capitalized mobile to generate affinity and increase brand value is Seattle-based Starbucks, according to Patricia Hewitt, vice president and managing director of consulting services for Mercator Advisory Group, a Boston-based research firm. She authored a study examining the major credit cards and emerging mobile wallets and concluded that the threats to existing iconic brands is considerable.
Today, major credit cards dominate at retail locations, with their logos prominent on registers and store doors. But as mobile wallets aggregate payment brands, these icons become secondary to the larger wallet’s identity.
“The credit card may still fund the transaction, but the brand is subordinate,” Hewitt says. “That’s important because it begins to eat into the real estate at the point-of-sale. Customers are no longer looking for the [credit-card] logo.”
If the mobile-wallet brand succeeds in overtaking the credit card in the minds of consumers, then that emerging brand can use its resources “to incent customers to keep more money in [that mobile] wallet, because it’s the funding source,” she says.
“The mobile wallet … is then able to use more of their own capabilities or the capabilities of others to move money between accounts, becoming less dependent on the [credit card] networks.”
Merchants may commandeer some of that opportunity, she says, naming Starbucks as a main example. The coffee chain started by leveraging its popular loyalty card, enhancing it with a mobile-payment piece and executing for the customer a consistent, delightful experience, according to those following the retailer’s success. Hewitt applauds the astounding volume (more than 11%) of the mobile payments being made at Starbucks locations.
That said, retailers on the whole face an uphill battle in that, as Hewitt points out, customers trust financial institutions, banks and the credit-card companies to handle their money. But as online and mobile begin to merge, those loyalties will blur, paving the way for mobile wallets and potentially even merchants themselves. “Customers will see more of a direct value in a merchant-reward loyalty payment,” Hewitt says. “I’m not dependent on the [card] issuer reward, and it makes more sense to me to go directly to [a particular] store.”
To that point, the concept of brand affinity can extend not only to card logos and retail chains but also to individual products and product lines. Last fall, Northfield, Ill.-based Mondelez International went into the second phase of a program to pair nine of its most recognized brands, such as Oreo and Trident, with high-tech startups in the social media and mobile fields. In this second phase, the companies were to pitch venture capitalists for funding for their proposed projects.
Many in the industry believe it’s only a matter of time before product brands engineer social and mobile programs reaching directly to consumers, potentially bypassing the retailers altogether.
Much in the way major online retailer Amazon hurt brick-and-mortar appliance and electronics outlets—essentially turning them into “showrooms” for things that customers inspected on-site but then bought online—c-store retailers may be “tasting rooms” for consumers, which could lead to shoppers ordering products (and getting rewards) directly from the manufacturers, according to Anton Bakker, president of Outsite Networks, Norfolk, Va.
Historically a loyalty solution provider, Outsite has evolved to offer brand-specific apps that have product-location, social-media and loyalty capabilities. He says the landscape may change in as little as 18 months.
“CPG companies are looking for a solution to go directly to the consumer,” Bakker says. “If [retailers] give them a solution, they will remain a shackle in the [supply] chain.”
Providing CPG companies with shopper history data and gearing up to accept mobile and other up-and-coming forms of payment are ways retailers can avoid irrelevance, Bakker says. His concern is that c-store operators don’t see this shift as a real threat.
“Best Buy didn’t see it coming,” he says. “[Retailers] want to remain the link in the chain between manufacturers and customers. They don’t want that link to become Amazon or UPS.”
Rethink Payment In the retail scenario that Hewitt of Mercator describes, incentives become the lure, the active currency for consumers. So as much as retailers have to envision a whole slew of new physical methods of payment—ranging from facial recognition to QR codes and technology embedded in watches or even under people’s skin—they have to consider electronic couponing an active part of the mobile revolution. (See timeline of payment evolution below.)
Mobile phones take the cumbersome paper coupon out of the equation, but discounting alone is not the inherent lure, says Bob Burroughs, senior vice president of product marketing for Sionic Mobile, Atlanta. It’s the offer’s relevance.
Referencing the importance of customer information and historic purchases, the retailer can customize coupons, corresponding them to the consumer’s habits, thereby having a better chance at achieving behavior change.
“Initial mobile ads were a shot in the dark,” Burroughs says. “By targeting a promotion, more likely [the consumer] will respond.”
Advocating a “holistic” view of loyalty, potentially across multiple, non-competing retailers, he says retailers can lure in customers who may not already shop in their stores by simply offering the right incentive.
“Let’s say you have two 25-year-old men and you’re able to look at the buying habits of each,” he says. “If the first one never bought anything at a GameStop or never had loyalty points from that type of merchant, you may not want to offer him entry in a contest to win an Xbox. But the other guy may want that and fill up at your store to get entered into that drawing.”
Solution providers both in the c-store arena and those catering to retailers in general have been developing “business intelligence” solutions for the past few years—to certain degrees of success—using mathematical algorithms and other methods to interpret data. Both retailers and suppliers continue to explore these opportunities, looking for ways to translate data into executable sales-floor strategies.
As those with discounting and loyalty programs can attest, mobile has a reach far beyond payment. Chris Quam, consumer insights manager for General Mills Convenience and Foodservice, Minneapolis, says people with mobile phones inside the c-store are actively making decisions, posting their opinions on social networking sites and leaving a trail of behavioral data that can be extremely useful to retailers.
General Mills has spent considerable time tracking keywords, developing demographic buckets and assessing behavior based on what people post on popular social-media sites, Quam says.
“You’ve got a lot of ‘I want or I need right now’ craving posts, which makes sense for c-stores,” he says. “They’re very often in the moment. … You’ll see tweets around a specific product or snack. ‘I need a Slushie right now.’ Or ‘I’m on a Slushie run.’ Then they’ll post when the mission’s accomplished.”
Special deals spike conversations, he says, especially when there’s a “hot” giveaway. Another trendy topic is gas. People love falling prices and hate when they have to gas up.
The lessons go back to the basics, Quam believes. “The same things that drive word of mouth offline drive them online,” he says. “Great service, surprisingly awesome taste, unbeatable deals, spontaneous surprises and the ongoing level of quality in the stores. … That fosters conversations.”
Calling social media “the new 800 number,” Quam says retailers need to view mobile as a direct line to what customers are thinking. “It’s a consumer insights gold mine of information, not just on how you’re doing but how your competitors are doing,” he says. “Listening to the consumer will give you ideas on what to change and what to keep doing.”
The imminent confusion brought on by mobile payment is forcing companies to change, with many actively choosing to reposition themselves. Duluth, Ga.- based NCR Corp., for example, acquired two companies late last year to help evolve its ATM and mobile-solutions services.
The company has grown from its history as an ATM company, in recent years having acquired two POS and software firms with roots in the c-store industry. Bill Nuti, NCR’s chairman and CEO, called its recent growth part of a “deliberate and thoughtful strategic agenda to profoundly reinvent the company.”
The larger goal is to become more of a turnkey, one-stop provider for financial transactions, be it with ATM functions or mobile payment, says Mark Critchett, director of marketing and strategy in NCR’s financial services business.
“A lot of our success is in the convergence of physical and digital channels, and we see that across all industries,” he says. “We do it in banking and in travel with mobile boarding passes … so we’re follow that same strategy.”
As suppliers jockey to best position themselves for the new era of mobile, many of the big players—including credit-card companies, phone carriers and mobile wallets—are doing so as well, Taylor of PCATS says.
A pivotal battleground will be in ownership of what he describes as the “secure element” embedded within the phone that will hold an owner’s identification. In different emerging business models, the phone carrier, card issuer or bank may ultimately achieve ownership of that part of the transaction. Taylor describes a scenario whereby retailers may have to “buy back” their own data. Fortunately, moves have been made to circumvent the ability for any one company to own that secure element, he says.
The question over data ownership is in part what drove many retailers to form their own mobile-wallet initiative, he says.
More than a year old, the Irving, Texas-based Merchant Customer Exchange (MCX) involves retailers such as Walmart, Target and Best Buy, but also c-store chains including Alon Brands, Wawa and RaceTrac. “Who better to own the data than the merchant, who knows what our consumer wants because we’re living with them day to day?” said Will Alexander, vice president of information systems and special projects for Atlanta-based RaceTrac, who spoke as a panelist at CSP’s Outlook Leadership conference in Scottsdale, Ariz., last fall. “We think we can provide a better solution.”
While the topic of mobile in the c-store space can spark any number of talking points, the winners will home in on what matters. And by all accounts, central to everything—beyond technology, logistics, even consumer acceptance—will be the brand: what it stands for, what it delivers, how it morphs to stay tenaciously and defiantly relevant.
As Starbucks has shown, the ability for any one brand to gain credit for the mobile experience in the consumers’ mind is completely up for grabs, says Hewitt of Mercator. But it’s up to the retailer to develop and execute a seamless plan.
“Until the consumer can begin to see value of not pulling out a physical wallet … that’s where you’ll see inroads,” she says.
For Banks of Cumberland Farms, the near-term reward is more obvious. “It does reduce the iron-clad dominance of the credit cards,” he says. “Interchange fees are our second biggest expense, so anything that makes that a level playing field is important.”
Types of Mobile Wallets
To help retailers understand the emerging types of mobile wallets, Boston-based Mercator Advisory Group reviewed several current business models and categorized them into five groups:
▶ Card Containers: These products passively store a consumers’ payment and loyalty card numbers as a form of backup.
▶ Card and Credential Containers: In addition to holding payment and loyalty card numbers, these products automatically fill in merchant checkout pages with the proper credentials.
▶ Digital Bank Accounts: Used primarily for bill payment and point-to-point payment using smartphones. These accounts typically don’t offer mobile shopping abilities.
▶ Mobile Payment Products: These products access a customer’s payment account offered by a single merchant or merchant aggregator, such as the PayPal or Starbucks models.
▶ True Mobile Wallets: These provide interactive access to a variety of credit or debit cards for use at the POS.