Chapter 1

Chapter One: Why Care about Mobile Commerce?


The Tipping Point is Here

Mobile commerce has finally reached a tipping point. But what got us here wasn’t a silver bullet mobile payments technology, whizzy new app or “aha” innovation out of any of the biggest names in payments. Nope. What got us there was a phenomenon that started to get traction 12 years ago and has just hockey-sticked ever since.

The consumer adoption of smartphones.

Well more precisely, the operating systems that are the invisible engines that enable mobile phones to do more than just make and receive calls and send text messages – and therefore, do a ton of things that were never before possible. Smartphone operating systems make it possible for smartphones to download and use apps for just about everything from analyzing the calorie counts in the meal you just ate to mastering the Fairy Zebra harvest in Zynga’s Farmville game. App stores assemble all of these apps into neat little categories and make them all just a click away. More than 845,911 applications have been developed, and roughly 32 billion were downloaded in 2012, for the iPhone and Android smartphones.

Smartphones + Spending = Mobile Commerce

Almost 90% of all human beings on the planet now own a mobile phone. Increasingly, the type of phone that they are buying is smart – capable of accessing the Internet and the applications that make them both useful and desirable. 55% of the people in the U.S. own a smartphone, and worldwide, about 27% do. Nearly 700 million smartphones were sold in 2012, 492 million smartphones were sold in 2011, and almost 200 million more than were sold in 2010, the year in which smartphone sales eclipsed the sales of PCs for the first time. 17% of the world’s population now is connected to the web via their mobile phone. That’s astonishing and the implication for developing economies is nothing short of miraculous. But that’s only a small part of the story.

In the U.S., more than two-thirds of those age 25-34 own smartphones, and 80% of those in that age group who buy a new phone choose a smartphone. More than half of everyone under the age of 65 who has purchased a new phone in the last 90 days has chosen a smartphone too. Even though they cost more than a feature phone does, these IP-enabled devices replace the need for many to buy stereos, PCs or other electronic devices to access the Internet and a variety of digital media. Smartphones, plus a monthly data plan, do it all.

Not surprisingly, income and smartphone ownership is also highly correlated. According to the 2012 Pew Research Center’s Report on Mobile Usage, more than 75% of those earning more than $75K across most age groups own smartphones; roughly half of those between the ages of 55 and 64 do too. Eighty percent of those between 25 and 34 who make $100K or more own a smartphone. As surprising is how tightly correlated age and smartphone ownership is. More than two-thirds of those with incomes of $35K or more own a smartphone. And that’s what makes smartphones and mobile commerce such a powerful combination. Recent research by Market Platform Dynamics reports that, conservatively, 60% of the spending power in the U.S. resides in people who own smartphones, with those statistics more likely to run closer to 70%.

It’s not just that smartphone owners have access to the Internet via these devices. It’s that they have access to the apps that power the commerce experience, and a tool that makes it easier to see an offer online and walk into a store and buy it. Sixty-two percent of U.S. mobile users between the ages of 25 and 34 own a smartphone and 53% of those between the ages of 34 and 44 own a smartphone. In fact, a vast majority of those with spending power in the U.S. and increasingly around the world, have both access to these powerful mobile devices, and therefore, access to the apps that power the commerce experience.

Mobile Commerce Today

For now, smartphone ownership has little to do with how often phones are being used as a substitute form factor to pay at the point of sale – the NFC/contactless experiments using the mobile have failed to get traction with merchants, at least not yet in the U.S. and all but a few places around the world. And cloud-based solutions are just beginning to emerge that are creating a more appealing payments experience for both consumers and merchants. Just 6% of consumers recently surveyed by The Federal Reserve say that they have ever used their phone to make any purchase at a physical point of sale – but that is up from the 1% reported in 2009 when the Federal Reserve Emerging Payments Group in Boston did its Survey of Consumer Choice study and asked consumers the same question. So, as a form factor substitute, it has a lot of ground to cover. And it will – much faster than we might have thought a couple of years ago. Smartphones just make it easier for merchants and consumers to interact with each other throughout the buying process using apps that help consumers to better navigate the shopping experience, make purchase decisions and complete a transaction.

• Consumers can use their mobile phones to more easily search for the things they want to buy using an optimized browser. In fact, one in a third of searches today are made with a mobile device.

• Consumers can opt in to location-based services and be served with deals, offers and inducements via their mobile device to visit a local merchant’s physical storefront (75% of on-the-go audiences takes action after seeing a location-specific message).

• While in those physical merchant locations, consumers can scan product barcodes and get product descriptions, reviews and ratings, check inventory levels and even see if another retailer in the area (or online) has it cheaper. Thirty-four percent of consumers comparison shop on their mobile devices while in the store.

 Consumers can pop open apps while on the move (or stuck in traffic) and shop online using an app optimized for the mobile screen, or simply surf the web to visit their favorite retailer online. Research shows that click  (and thus the likelihood of sales) on the mobile device are actually higher than those on desktops or laptops – 45% higher in fact – in part, due to the context in which these sessions are happening – when consumers are actually in the mood to want to buy.

 Consumers can use apps to pay for things they buy anywhere in the store – avoiding the time and inconvenience of standing in line. Apple’s Easy Pay is probably the most “famous” version of this relatively new type of payment app. It allows customers to pay for an in-store transaction on their phone without speaking to a store employee, by scanning a product’s bar code and paying for it with their iTunes account.


• Consumers can opt in to apps that mash up loyalty and payments using bar codes to pay at their favorite coffee shop or lunch spot and be rewarded for doing so. Starbucks, with its bar code-enabled mobile app, has amassed more than 7 million users and over 2.1 million transactions per week, and nearly 20% of transactions on Starbucks cards now come through mobile payments, making it the largest mobile payments network in the U.S. in less than one year. Level Up, with more than 1 million users, offers free credit to spend at participating outlets and then the opportunity to save money every time a customer returns and uses Level Up to pay. Most users of more traditional digital coupons do not return; however, more than 66% of the people who used the Level Up app to make a purchase returned to the same retail store within the same month.

 Consumers can use the plastic cards in their leather wallets to pay their plumbers, electricians and flea market vendors who can use their phones as point of sale terminals via a dongle that plugs into the headset jack. GoPayment (powered by ROAM), Square and PayPal Here have all introduced dongle-based solutions to enable small businesses and casual sellers to accept electronic payments. ROAM is the number one provider of encrypted mobile card readers in the world. As of August 2011, over 300,000 readers had been shipped and the company expects to ship over 1 million units by August 2012.

 Consumers can download a digital wallet (or access one that they already set up online) that stores payment, loyalty and other relevant information and pay at the point of sale. PayPal, the granddaddy of the digital wallet with 110 million active accounts worldwide, has launched a digital wallet solution that makes it possible for PayPal account holders to pay at the physical point of sale. Google Wallet and ISIS are vying to do the same with an NFC-enabled solution.

 Consumers can pop open their Facebook mobile app and check their Facebook news feeds and see an item that their favorite merchant is offering – and go to that fan page and buy it. While still in its infancy, Facebook commerce is poised to ignite as the buying process becomes more streamlined and retailers learn to maximize the utility of the channel in a way the buyer wants to see it used.

 Consumers can pop open their Twitter mobile app, see a tweet about a special offer and go to the merchant site to make a purchase. In 2009, Dell Inc. used Twitter to generate more than $6.5 million in orders. Thirty-four percent of marketers have generated leads and 20% have closed deals via Twitter since then.

The Promise and Potential

There are four useful insights across all of these use cases:

• Mobile is what’s fueling the online-to-offline commerce revolution. Mobile commerce isn’t about the extension of online commerce to the mobile phone. It is much, much more important than that. It’s about driving foot traffic into merchant locations where sales can happen – now without, in most cases using the mobile phone to consummate the transaction, but soon with it. We’ve been talking about this concept for several years – and predicted its impact on retail commerce in 2006 as we observed the rapid adoption of IP-enabled devices and cloud-based computing. For sure, mobile (and increasingly tablets) are used as PC-substitutes for browsing and buying but the real power of mobile is its ability to serve up information that drives commerce into a physical retail location and what makes mobile such a powerful commerce enabler.

• It’s happening faster than you think – blink, and you miss important innovations and insights. With a few exceptions, most of them didn’t even exist two years ago and once launched, they don’t stand still. Of the list, GoPayment and Square are the true “veterans” in the mobile payments space. GoPayment captured first mover advantage with its B2B mobile payments solution in 2009, leveraging its installed base of small businesses and merchant acquiring capabilities to launch its mobile payments solution. Square has evolved from a dongle to a small business network with Register and Card Case. PayPal Here launched with an end-to-end solution that knits together all of PayPal’s assets to drive a powerful small business solution. Most of the innovations in mobile commerce have evolved over the last year as smartphone adoption has accelerated and cloud-based capabilities have matured and new features and solutions seem to launch weekly – only a small fraction will succeed, but one can learn from all of them.

• The more things have to change, the less they will. Most of the solutions that have gotten traction had one thing in common: they didn’t require merchants to change their physical point of sale configurations or consumers to do things that were outside of their comfort zone. Some of the use cases were nothing more than the mobile device used instead of a PC to visit a website and buy online, even those that enabled price checking in-store. Those that did involve the actual payment transaction leveraged existing point of sale capabilities – plastic cards that were swiped thru dongles attached to mobile phones, payment apps that were activated by bar codes that were scanned at the physical point of sale via apps that were easy to download and append a payment device to. These are the payments apps that are getting traction because it is easy and costless for merchants and consumers to adopt.

It’s much more about the new kids on the block. Most of these innovations are from non-traditional players. There appears to be a dearth of incumbent payments players’ names in the innovations that are moving the commerce ball down the mobile payment playing field. Oh, they’re a part of it for sure, but it’s their assets that innovators are using to deliver the innovation that is reshaping the commerce experience. In most of these cases, incumbent payment network rails power the payment transaction – since many apps are ultimately connected to a credit or debit card or card account that runs over their network. But, at least for now, they aren’t the innovators, just what makes other’s innovations easier for merchants and consumers to deploy.

What will get in the way – As exciting as all this is, there are still hurdles to overcome. A Harris Poll reports that the consumer isn’t entirely convinced that mobile commerce is secure. Storing cards in a digital wallet on the phone makes about 61% of the consumers surveyed nervous, according to this survey, with about half reporting that they don’t see themselves using a store branded payment app to pay at a favorite retailer. The perception of security (or lack of it) seems to have the potential to blunt mobile commerce adoption.

• But, as we all know, surveys and statistics can be a bit misleading and without access to the raw data it is hard to know exactly how many people and in what age groups were surveyed and how many of them own and use smartphones. My 70+-year-old parents would answer these survey questions quite differently than my 30-, 40- and 50-year-old colleagues who would have different answers than a 19-year-old college student would. And many people said they were nervous about eCommerce at the start of the commercial Internet, but still happily typed their card info in when they wanted to buy something.

As stated earlier, it’s the smartphone users whose opinions matter most since they will be driving the mobile commerce future – and are already blazing the trail today. They are more comfortable with the device, know how to use it, password protect their phones and their apps and seem to understand that, instinctively, any mobile payment account tied to an existing payment card is protected the same way it is protected if shopping online – the card issuer covers the losses. Security is probably much more an issue to the merchant, and in particular, the small merchant who is using dongles to enable electronic payment, who ultimately bears the cost in the event of a breach (an issue that we will discuss in much more detail in Chapter 5).

Another hurdle is acceptance. It’s the classic chicken and egg conundrum that plagues each and every new payments method since the Lydian coin was introduced in 700 BC. Apps that enable a piece of the commerce process – and not payment – are far easier to ignite in the first instance since they don’t really depend on merchant acceptance to “close the loop” and in many cases, can rely on an imperfect solution at the merchant to do so. Merchants can send an SMS message with a coupon code or enable an offer via a Foursquare check in and simply have the consumer show that code or their phone to the retailer at checkout to redeem the promotion. It may not be elegant, but it works. It’s not that easy on the payments side.

Consumers will lose interest in downloading mobile payments apps if they can’t use them – as attractive as they might be. NFC-enabled solutions are having a tough time now since there are few places to use them (and even fewer phones to support them in the U.S.), even though the offers being used to incent consumers to adopt them are attractive. The solutions that have taken hold are those that have relied on low-tech bar codes to enable payment and even come bundled with offers to incent initial and repeat usage. All smartphones seem capable of downloading bar codes and scanning at the point of sale with little friction on either the merchant or consumer side.

Another big, perhaps the biggest hurdle is the business model – how will mobile commerce drive sales – and how does it overlap with a merchant’s loyalty initiatives? It’s a given that consumers won’t pay more to do the same thing on their phone that they used to do with a plastic card – and in fact, expect to be given an incentive in the form of an offer or reward for being asked to do something new. That seems to be the SOP for new commerce apps – there is with Level Up. That means that the business model onus is on the merchant and/or the innovator to devise a model that gets adoption and does so profitably. The business model levers available to the merchant and the innovator are pretty much the same regardless of the type of innovation: transaction fees, customer acquisition and data access. How these are put together is where the rubber meets the road and where there is still a lot of experimentation. This topic will be covered in depth in Chapter 9.

The Bottom Line

So, where does all of this leave us? If you are a merchant, mobile commerce is no longer an“if” – it is a “what” and a “how quickly.” The decisions that merchants face are how they plan to introduce and use mobile across the shopping continuum. Should you play wait and see and adopt whoever wins over other segments or your competitors? Should you dip your toe in now especially since it is easy and cheap? How do you use these new loyalty schemes bundled in with many of the mobile solutions to your advantage? For innovators, it is how much value is being added to consumers and whether the value added is worth what merchants have to do to enable the innovation. If you are a consumer, it’s what apps will you “standardize” around – smartphones make it a lot less bulky for consumers to “carry” multiple payment types, but there isn’t an infinite number of apps that they will download and use. It will become cumbersome to track and monitor spending across multiple apps and scrolling through a long list of apps, even if organized into a digital wallet, will be too tedious and time consuming for most people to want to do.

This book is designed as a ‘how-to’ guide to making the most of the mobile commerce opportunity now facing every merchant and innovator of every size. It is short on lecture and long on practical insights to help drive you to a well-reasoned decision about how and why to approach this powerful enabler to your business. Each chapter will examine a critical decision factor and provide case examples, proven insights and a set of decision frameworks to use in making these decisions.

We’ll tackle everything from the ecosystem, the complexities associated with making the decision in the first place, and security and risk, to acceptance, the wallet, the business model and who’s doing it well and what you can learn from them.

We’ll start with painting the picture of a world of commerce that is enabled and empowered via the mobile – and that is what we will turn to next.