UK’s Lessons For US Mobile Payments Adoption

Consumers and retailers in the U.S. apparently just aren’t getting it.

The latest stats coming out of the U.K. show that one in 10 card transactions are now contactless. And that has jumped like a jackrabbit in just the last year.

Enabling all of the London Transport System to accept contactless last September contributed a lot to that increase — 1 million transit rides a day are now done via a contactless tap at the turnstile. Roughly 320,000 of the U.K’s 1.7 million merchant terminals are now contactless too – and a mandate to make every single POS terminal in the U.K. contactless by 2020 will rapidly close that gap.

Then there’s Australia, where 66 percent of Aussies now understand they have a card that allows them to tap and pay. Fifty-three percent of them say that they do that at least once a week at grocery, fast food and drug stores, most of which have contactless terminals.

Canada is another market where the use of contactless is skyrocketing. Seventy-five percent of retailers accept contactless payments. Nearly 10 percent of all domestic transactions are contactless now and said to be growing at the rate of 1 percent a month.

SO, WHAT’S UP WITH THE U.S.?

Now contrast that to the latest stats coming out of the mobile wallet adoption study that PYMNTS.com does every quarter with InfoScout.

Remember, in the U.S. that’s now the main way to pay by tapping/waving since issuers pretty much abandoned contactless cards after a massive push and corresponding flail years ago. Contactless cards are as scarce as hen’s teeth today in the U.S. Anyone who has one probably doesn’t even know it.

So, perhaps not surprisingly, the hot-off-the-presses stats that we released last Thursday at Innovation Project 2016 painted a very different picture of the relationship between contactless payments and the U.S. consumer at the point of sale.

Here, it seems that consumers really aren’t all that into contactless payments at the physical point of sale. Apple Pay is the mobile wallet that’s been in the U.S. market the longest – launched in September of 2014 to much fanfare — and uses NFC technology as its enabling technology. We’ve been tracking its adoption and usage ever since —and have multiple observations over the 18-months lifespan of Apple Pay.

What we observed in March 2016, compared to earlier results, was surprising.

The number of people who’ve installed Apple Pay and used it at least once is stronger than it’s ever been.

But repeat usage is down — and has been going in reverse ever since March of 2015. Today, only 3.5 percent of eligible transactions for those consumers are via Apple Pay, down from 5.9 percent in March of 2015 and 4.6 percent in October. Eligible transactions are those where the consumer has the right phone and merchants have the right enabling POS technology — that is the intersection of consumers with iPhone 6/6S’s and merchants with contactless terminals.

But that’s not the most interesting (we think) or disturbing (if you’re on the Apple Pay team) takeaway.

One can easily explain away the drop in usage as owing to the flattening of the adoption curve as more people buy iPhone 6/6S models. If only 3 percent of those who bought iPhone 6/6S did so because Apple Pay could be used with it, it’s only logical that the next wave of iPhone customers wouldn’t be driven to that feature either. Overwhelmingly and perfectly predictably, consumers bought their new iPhone because of the larger screen size.

Yet the speed and convenience of NFC/contactless at the point of sale that seems to be attracting consumers in the U.K. and Australia and Canada to contactless like Kim Kardashian to selfies, doesn’t seem to be that much of an incentive to the Apple Pay user here in the U.S.

For the first time since we started doing this study in November of 2014, we’re seeing an uptick in the number of consumers with Apple Pay wallets in stores that accept it and who didn’t use it say that they didn’t use it because, well, they didn’t want to. They made a conscious decision to pull out a card – and sometimes even cash — to pay for their purchase instead.

So, does this mean that we should change our tagline here in the U.S. to something like “the home of the free and the land of the Luddite?”

Not exactly – or at least not yet.

What the U.K. and Australia and Canada markets teach us about the contactless experience at the POS is precisely why consumers in the U.S. are voting with their plastic wallets.

And also why it might not be a slam dunk to assume that those happy contactless consumers in the U.K. and Australia and Canada will willingly move to mobile wallets that use the same technology.

GIVE ME UBIQUITY OR GIVE ME DEATH

What do both the U.K. and Australia have in common, besides people with cool accents?

They have heavily concentrated banking/acquiring and retail segments. And they serve a very concentrated, well-defined geographic market.

Let’s take the U.K., where Barclays drives more than 40 percent of all credit and debit spend.

They also happen to be the No. 2 Merchant Acquirer there – with a 38 percent share in a segment where you don’t even need all of your fingers and toes to count the number of acquiring options. So when the biggest issuer of cards and second biggest acquirer decides to get behind contactless, you suddenly have a situation where overcoming the biggest impediment to ignition is within your direct control: giving consumers contactless cards and, at more or less the same time, the places to use them.

And the handful (don’t even need a whole hand) of other large issuers and acquirers did the same.

And that’s exactly what you have in the U.K.

There are contactless terminals in places where low value, high frequency transactions happen a lot: QSRs like EAT, Pret a Manger, Slug & Lettuce, Greggs the Bakers; grocers like Tesco, and of course the massively used London Underground.

The U.K. Cards Association, which keeps meticulous records about everything payments in the U.K., reports that contactless debit cards account for more than half (54 percent) of all debit cards in circulation, an increase of roughly 50 percent from the year prior, due to the growing number of places that people use debit, even cash, and now contactless debit. Average transaction values of ~£8 ($11.58 in USD) just underscore the notion that consumers are now in the habit of using these cards regularly – and perhaps even daily — to quickly and conveniently pay for the Tube, and grab coffee and lunch at most of the places they probably visited well before there were contactless POS terminals installed. (Of course, in terms of value, contactless is still well below 2 percent of total card spend.)

But there’s another nuance at work, too.

Quite a bit of this activity is concentrated in the City of London. With a population of 8.5 million (roughly the size of New York) and 3 million daily commuters, getting a critical mass of retailers and consumers is a bit less daunting. Throw in the Summer Olympics in London back in 2012 and an effort around it to install contactless terminals to expedite the movement of people coming in and out of the city – and you have an environment with all of the critical ingredients lined up for contactless cards ignition: concentrated geography, concentration of merchants, less than 10 million consumers to get on board, a ready market of 3 million daily commuters, and issuers and acquirers (often even the same bank) who can slap cards in consumers’ hands and terminals in retailers’ shops to get the flywheel moving.

Australia, and even Canada, are very similar.

In Australia, 95 percent of its credit cards are issued by five banks. Debit is similar. And while the overall population of Australia is 23 million, its two largest cities, Sydney and Melbourne (at 8 million collectively) account for one-third of the population, but more than half of the country’s GDP. Here too, you don’t need many fingers and toes to total up the issuers and merchant acquirers who serve the market.

Australia also has a highly concentrated retail sector.

Until recently, the country was served almost entirely by domestic retailers. Food/drug, for instance, is the second largest retail category in Australia, with 98 percent of the market concentrated in four domestic merchants. Apparel, the largest retail sector, is defined by entrenched domestic brands as well, although international brands like Sephora, H&M, and Ralph Lauren are planning to challenge the status quo by opening outposts in Australia over the next two to three years.

Starting to sound familiar?

Well-defined geography. Manageable number of consumers living in that well-defined geography. Concentrated merchant segment with a few large merchants that drive a disproportionate swath of spend. The ability to more directly control contactless card issuance and contactless merchant POS deployment.

All of that greases the skids for a path to more readily putting contactless cards in the consumer’s hands and contactless terminals in many of the places they probably frequently shop today.

But there’s one more nuance.

One that I think marks the biggest difference between the experiments we see today in the U.S. with our NFC mobile wallets and other markets where contactless seems to be taking off.

ONE FORM FACTOR, INDIVISIBLE, AT ALL THE PLACES CONSUMERS SHOP

The consumer in the U.K., Australia and Canada is able to use the same form factor everywhere she shops.

The contactless card that she taps one place is the same card that she dips at merchants that may not be contactless-enabled. In those places and in those markets, consumers don’t have to put away a contactless card and pull out another form factor to pay for something at a merchant she likes to visit.

Yet, that’s what the consumer is being asked to do in the U.S.

Consumers are being asked to download a mobile wallet. But only if they have the right phone.

Provision a card. Provided their bank is supported by the mobile wallet.

Then remember to use that wallet when they go into a physical store. At the still relatively small number of places that today enable contactless transactions.

In other words, a small number of people today have a small number of places to use their mobile wallets.

We’ve gone to market here in the U.S. – as I have said many times before – constraining both the supply side and the demand side of the market.

And even as easy as we’ve made the downloading of the mobile wallet app and the provisioning of the card, having to pull out a phone to pay at the tiny number of places today in the U.S. that enable contactless adds just way too much friction for the consumer.

But what doesn’t is reverting to the form factor that they know is accepted everywhere: the plastic card or cash.

And even to my surprise, if they have to dip and not swipe that card.

That’s what our data on mobile wallet adoption using NFC technology shows.

Which explains why Starbucks’ mobile wallet is crushing it at 22 percent of all transactions.

Consumers visit Starbucks every day – maybe even multiple times a day. And they can use any phone to download the app – and use that phone with that app at every single Starbucks. Starbucks’ mobile wallet is ubiquitous – at Starbucks.

NOW FOR THE “BUT”

OK, you say, so all we need to do now is hustle up and get contactless POS terminals out there in massive force.

If it were only that easy.

In the U.S., there simply aren’t the same dynamics in play.

Two million contactless terminals today sounds like a great start — until you do the math. There are something like 13 million POS terminals across a massive geography that is the United States, not including mPOS devices.

The U.S. is also a market in which there are 1.2 billion payments cards in circulation, more than 47 billion debit card transactions, more than 26 billion credit card transactions and 209 million adults over the age of 18.

Oh, and something like 14k financial institutions that issue those cards and countless merchant acquirers and ISOs all hawking merchants to deploy new terminals.

It’s a whole lot harder to wrangle this ecosystem to the ground given the diversity of merchants and the engrained plastic card habits honed by consumers over the last 50 or so years.

So where does that leave us?

ARE WE REALLY NOWHERE WITH MOBILE WALLETS IN THE U.S.?

That depends.

Unless we all get pretty serious, pretty fast about giving consumers another reason to use those contactless mobile wallets – and not just for paying at a checkout counter once they stand in line and walk up to it – then it’s a slam dunk that the next 10 years won’t look any different than the last five.

As someone said at the Innovation Project panel in which we discussed the results last week, if we’re waiting until the consumer approaches the checkout in a store to give them a reason to pull out a mobile wallet, we’ve lost them.

That’s exactly right.

The act of paying in the physical store isn’t broken today. But giving consumers a mobile wallet that works at a modest fraction of the stores they visit does break that experience. And that friction is enough to drive consumers back into the arms of their plastic cards.

Our challenge here in the U.S. is first making the mobile wallet experience valuable to the consumer, then figuring out what technology can best enable that experience in a store.

We’ve done just the opposite.

The challenge for the U.K./Australian/Canada markets is surprisingly similar.

If people are happy pappy using their contactless cards at checkout, and all those mobile wallets are doing is substituting a tap with a card with a tap via their phone, that’s not much of a compelling case for consumers to make that switch either.

Bottom line: Mobile wallets that only exist to pay for things at the point of sale will lose in most developed countries. They will lose in places like the U.S. where there aren’t enough contactless terminals for people to get into the habit of using them, and they’ll lose in places with ubiquitous contactless terminals because they are slower than waving plastic for many transactions.

Mobile wallets will win only when using a mobile wallet is SOOOO much better for consumers than using plastic that it’s what they really want to pull out when they walk in a store. For better or worse, paying with plastic is SOOOO easy, the something that makes mobile payment better isn’t going to be payments.