In most economies globally, cash is still king – typically accounting for the majority of in-store payments. However, cash usage worldwide has been decreasing rapidly. Whereas the greatest progress has been made in developing markets across Africa and Asia, the Nordics are gearing up to become the first cashless societies within the next decade.
Card payments remain far from frictionless
As the most prominent challenger to cash, payment cards have been around for many decades, gradually replacing cash in most economies. Although card networks have invested heavily in improving the payment experience for cardholders, most innovations have had a limited success. In some countries (e.g. Australia, UK, Singapore), the recent introduction of contactless technology has somewhat streamlined the in-store payment process, helping card payments penetrate small value purchases.
Correspondingly, mPOS providers have helped extend card acceptance to smaller merchants. Although typically more expensive than traditional acquirers, innovative solutions (e.g. card acceptance via mobile/tablet) and flexible terms offered by the likes of Square in the U.S. and iZettle in Europe are increasingly popular, especially amongst micro-merchants.
Yet despite such efforts, card payments remain far from frictionless, while technological advancements have allowed for the emergence of new, more disruptive payment methods. With mobile phone penetration becoming close to universal in most societies, using one’s mobile to pay in-store seems to be an obvious choice. Amongst a multitude of different solutions available worldwide, we discuss some of the most prominent mobile payment solutions that have gained significant traction or hold considerable potential across different regions.
Africa: Mobile financial services
Given the lack of available infrastructure (approximately 500 thousand POS terminals estimated throughout the continent) and a limited access to traditional financial services (only 10% of the population is believed to have a debit/credit card), it is not surprising that Africa was amongst the first regions to see the emergence of mobile payments. Helped by relatively high mobile penetration, mobile financial services started to gain traction a decade ago on the continent, with mobile operators rather than banks at the heart of the service.
Most prominently, in Kenya, M-Pesa, has been hugely popular. Since its launch in 2007, the mobile payment solution, powered by text messages and serviced by 130 thousand retail outlets acting as banking agents, has become the number one payment method for person-to-person payments and transfers, and later for retail payments (96% of households use the solution).
Although typically highly successful in their country of origin, the unique characteristics of each African market (including the regulatory environment and the mobile carrier landscape) has hindered the international expansion of these solutions. However, with the growing popularity of smartphones, more sophisticated mobile payment solutions are expected to emerge in the coming years that could fare better in conquering the region.
Europe & US: P2P to B2C?
When Apple and Google first launched their mobile payment solution a couple of years ago, expectations were high for Apple Pay and Android Pay to kick-start a new era for in-store payments. However, the combination of card payments and fingerprint verification has failed to gain traction. Although many have tried these solutions globally, for now, few turn to them as their go-to payment method, with limited merchant acceptance and a lack of clear consumer incentive amongst the most cited reasons for slow uptake.
On the other hand, in-app mobile payment solutions are on the rise. While most of these, typically account-to-account based applications, start out as a free-of-charge person-to-person (P2P) payment solution, once the customer base is large enough, they are eventually applied to retail payments (B2C).
Sweden’s Swish is a good example of this trend; the P2P payment app owned by the largest Swedish banks is now used by 5.5 million Swedes (over half of the country’s population), having only launched five years ago. The app has since been adapted to a retail environment, allowing users to pay for goods in-store by scanning a QR code. While accepting Swish payments does not require any additional investment from the merchant, service charges are comparable to those levied for card payments – giving merchants little reason to deny the consumer such payment.
P2P mobile payments are also increasingly popular in the US. For instance, Venmo, a digital wallet linked to customers’ bank accounts, cards or Venmo accounts, enables customers to seamlessly send money to each other. Previously without significant competition, Venmo topped US$38 billion in transaction volume 2017. Meanwhile, Zelle, another P2P app launched by a consortium of leading U.S. banks, appears to have already surpassed Venmo (247 million P2P transactions worth US$75 billion in 2017). Should Venmo and Zelle follow Swish’s example and launch an in-store payments solution, their vast P2P customer base could help them become the go-to mobile solution for in-store payments.
China: The battle between WeChat Pay & AliPay
Contrary to Europe and the U.S. where mobile payment solutions are built on the existing financial services infrastructure, the less developed financial system in China has enabled other players from outside the industry to fill the void. With transaction volumes (US$12.8 trillion in the first 10 months of 2017) dwarfing figures from most other countries, two internet giants dominate the mobile payments space. While Tencent’s WeChat Pay is essentially the payment feature of the hugely popular WeChat social media platform, Alipay is the retail payment solution of Alibaba, the world’s largest e-commerce platform. Building on the vast customer base of their parent companies, both mobile payment solutions are now increasingly used for in-store payments in China.
With both WeChat Pay and Alipay being the payment of choice for hundreds of millions of customers (the latest figures show 520 million AliPay and 200 million WeChat Pay registered accounts), acceptance by merchants has become a necessity if they are to retain existing customers and attract new ones. As transactions can be verified via QR codes (displayed at the store or on the customer’s smartphone), and with service charges typically lower than in the case of card payments, merchants in China have been quick to recognise the opportunity. Moreover, both solutions are now making their mark globally. Alipay customers can now pay at millions of merchants in the U.S. and Europe, while both WeChat Pay and Alipay have recently launched in multiple Southeast Asian countries, aiming to replicate their success in China.
India: Demonetisation driving mobile payments
Compared to China, mobile payment adoption in India is still in its early stages of development (56 million mobile payment users in 2017). However, fuelled by the government’s “digital India” programme, the country is now the fastest growing proximity mobile payment market. The launch of a real-time interbank payment system has enabled the emergence of account-to-account mobile payment solutions. Correspondingly, the government’s recent demonetisation programme, which has taken over 85% of the country’s cash out of circulation, has prompted shoppers to turn to digital alternatives.
With 90 million active users, Paytm, is the most popular mobile payment app for in-store purchases. The 0% service charge and incentives for merchants for signing up customers has helped Paytm recruit 6 million merchants (incl. grocery stores, restaurants as well as rickshaws) in a short space of time. On the other hand, justified by a lack of trust towards digital transactions most shoppers continue to prefer cash. Therefore, the government’s perseverance in promoting digital payments is likely to be key in boosting mobile payment adoption and helping the likes of Paytm grow further.
Growing smartphone penetration has enabled for the emergence of different mobile payment solutions around the world. Driven by different forces, including regulation and merchant initiative, some of these have already gained significant traction in their home market. However, as these solutions attempt to conquer foreign markets, the evolution of some is likely to lead to the demise of others. Whichever succeeds in going global is likely to shape the near future of in-store payments.