Mobile Apps and Digital Payments

Mobile Apps and Digital Payments - A Winning Combination for Creating a Better Customer Experience and More Profits for Merchants

This article is from JEGI's November 2016 Tech M&A Update written by Joseph Sanborn, [email protected]

This week, JEGI will be hosting a roundtable executive dinner on the theme of “Mobile-First Technologies & Digital Payments Fueling the Next Generationof Consumers.” Our event falls five years after Google Wallet was introduced to the US market with much fanfare, but was accepted in only a handful of coffee shops in Silicon Valley. The vast majority of retailers showed little interest in accepting mobile wallets, since they required the adoption of expensive new payment devices. Similarly, most American consumers could not understand what the excitement was all about with using a phone to pay for a purchase.

The pendulum began to swing, however, as credit cards issuers established a goal of October 2015 for business to adopt EMV (Europay, MasterCard, Visa) payment technologies in the States (as has been the practice in Europe for years) to help reduce fraudulent card transactions. The rollout of EMV technologies provided a critical impetus for retailers to install card readers that enabled card acceptance by both EMV and Near-Field Communication (NFC) technologies, with the latter being significant for the widespread adoption of mobile wallets by retailers. (For those not familiar with NFC, it is the technology that allows contactless payments, such as tapping to pay with one’s Apple Watch or iPhone at retailers.)

NFC is the communication between two electronic devices that enables proximity payments to be made by either tapping or waving a smart phone in front of the terminal, whereas EMV is the insertion of a chip within the receiver to transfer payment.

Heavy Adoption Ahead

While CB Insights estimates that only 20% of payment terminals are equipped for contactless payments, most large retailers have adopted the payment method, and the expectation is that smaller merchants will do similarly over the next few years (smaller merchants have effectively been given an extension on the October 2015 requirements of card issuers to comply with the new guidelines).

Consumers are warming up to mobile payments for a variety of reasons, ranging from convenience (e.g., you only need to take your phone when you go out and can leave your wallet at home), to security, to the promise of better loyalty programs and discounts. A recent study found that 39% of all US mobile users made a mobile payment in 2015, which is up from 14% in 2014. It is estimated that by 2020, more than 90% of American smartphone users will have made a mobile payment. Similarly, merchants are seeing mobile payment solutions as a means to better engage with their customers, as well as streamline their operations.

Strong Effectiveness of Mobile Apps

Mobile wallets allow merchants to better identify and understand their customers across the physical and digital worlds. In addition, merchants are recognizing the superior ability of dedicated mobile apps at driving purchases relative to mobile and desktop browsers. Recent studies by Criteo have shown that the average order value achieved via mobile apps is 2% higher than an order completed on a desktop, and 10% higher than on a mobile browser. The chief reason for the success of mobile apps in driving sales is that they are optimized for the mobile environment (i.e., small screens with inconsistent network quality) and tailored to each merchant’s offerings and brand experience. In addition, mobile apps have been shown to be more successful in driving purchases than mobile browsers at every point of the conversion funnel, as shown in the accompanying chart, and even exceeding the desktop rate by 20%.

Increasing Use of Mobile for eCommerce

As we look ahead to the official start of the Christmas shopping season, it is worth noting the studies from last year on the impact of mobile (both mobile browsers and mobile apps) on online purchases. Black Friday Weekend 2015 reached an unprecedented level of mobile devices being used for online purchasing, with 41% of eCommerce transactions being completed on either a mobile app or mobile browser during the three days following Thanksgiving. To put this in context, the quarterly average for mobile being used for online purchases is approximately 30%, so mobile accounted for 33% more eCommerce transactions during the most important period for retailers in 2015 (Black Friday Weekend).

With analysts widely predicting that mobile will account for more 50% of online purchases during Black Friday Weekend 2016, the challenge for merchants is how to create a mobile experience that drives engagement with their customers and results in a transaction being completed. While there are clearly benefits for merchants in having consumers constantly tethered to their mobile devices, there is also the daunting reality that the five to seven-inch screens create a potential customer with far less patience than they might have when shopping from a desktop browser. According to studies by MasterCard, the average online cart abandonment rate is 68%, but soars to a distressing 97% on mobile!

Enhancing the Customer mCommerce Experience

With customers showing an increasing preference for doing more of their online shopping on their mobile devices, merchants are rushing to adopt solutions to improve the mCommerce experience for consumers, with the goal of reducing friction in converting mobile shoppers into purchasers of their goods. Amazon is widely regarded as the leading merchant for developing solutions tailored to improving the mobile shopping experience, with its success largely attributable to its ability to simplify the user checkout experience.

Recognizing what has made Amazon so successful on mobile, merchants are looking to improve their own conversion rates by leveraging mobile wallets and other related mCommerce enablement services, like Autofill, which populates customer billing and shipping information. These solutions are enabling smaller merchants to streamline the purchasing experience on mobile devices by significantly reducing the amount of information that a customer has to enter on a small smartphone screen.

Mobile Gives Rise to Next Generation Loyalty Programs

The combination of mobile wallets and apps is allowing a broader group of merchants to develop more comprehensive loyalty programs to better engage customers, replacing the need for physical wallets stuffed with reward cards that are easily lost or forgotten. Merchants have recognized that it is far easier to drive profits through retaining and engaging current customers than by acquiring new ones. Several studies have validated this point by showing, for example, that a 5% increase in customer retention can lead up to a 95% increase in profit, and that it costs a merchant 5-10x more to acquire a new customer than to sell to an existing one.

Sweetgreen, the quick-service salad restaurant, is regarded by many as a leader in leveraging mobile. It has achieved a cult-like following with the help of a loyalty program that is housed on a dedicated mobile app, which also processes payments. Mobile payments through the app represent the largest portion of this company’s total transaction volume, ranking higher than any credit card. The Sweetgreen app is also the fastest way to pay (saving customers between 5 and 20 seconds at check-out) and also reduces the number of cashiers required at a venue. The company uses back-end components to track and analyze customer activity captured through its app and optimizes how best to engage a specific customer.

The Mobile Payments Road Ahead…

At JEGI, we are excited by the emergence of an interdependent mobile commerce ecosystem. Relying on mobile apps and mobile wallets to better engage with customers and drive profits, merchants are leveraging back-end platforms and tools tied into payments infrastructure, digital loyalty solutions and mCommerce enablement. Our firm has developed a more comprehensive report on this area; please contact Joseph Sanborn at [email protected] to schedule a time to meet to discuss it further.