Can Android Pay be a “next best thing” in mobile payments?

How wallets from smartphone device/OS companies like Google’s Android Pay can be the next catalyst needed to further accelerate the growth and adoption of mobile payments.

Smart phones offer a very strong value proposition in payments. Besides being ubiquitous and available practically all the time with consumers, they replace dumb physical cards with versatile software and powerful hardware allowing for exponential improvement in functionality and user experience. They also enable better security with biometric authentication and tokenization. Additionally they allow for real time capture of data enabling better consumer analytics, campaigns and programs.

However, according to calculations based on data from the World Payments Report, 2014, electronic payment transactions made via mobile phones across the world account for approximately 7% of total non-cash transactions in 2014 with an annual 60% CAGR. These adoption numbers demonstrate that the expected exponential shift to mobile based payments is still yet to happen. Adoption rates also seem out of sync with the much higher levels of smartphone penetration and growth across the world and the strong value proposition that smartphones offer over physical cards.

It is apparent that despite many strong fundamentals, there are still major issues that may be hindering an exponential growth in mobile payments. This analysis attempts to explain how device / OS based mobile wallets can help address some of the issues and potentially be a “next best thing” to catalyze exponential growth and adoption of mobile payments.

The smart phone value proposition is changing the presentation stage in the payments cycle or stack where a payor (the consumer) initiates a payment request to a payee (a merchant or another person). Taking advantage of this change, a large and diverse set of companies have built a variety of standalone payment apps and mobile wallet to grab a piece of the mobile payments pie and control consumer touch points, loyalty programs and transaction data. The companies include different types of stakeholders in the payments ecosystem like banks, card associations, retail companies, e-commerce companies, telecom companies, internet payments companies and mobile app companies. As a result there are a huge number of mobile payment apps and mobile wallets currently available to consumers.

The payment apps on offer allow consumers to make payments to merchants or peers. The mobile wallet apps on offer typically store account information of different payment services like banks, cards, online payment services, prepaid cards, loyalty cards, vouchers etc. Consumers can then view all their various accounts and select an account which they want to use to make a payment. The payment apps or mobile wallets can be used by consumers for different payments use cases like making payments to merchants for purchases inside a store, online on a browser, inside an app like a game or an online shopping app, getting a transaction billed to their mobile phone bill or to pay another person.

Different industry and business priorities, complex partnerships, diverse payments network strategies (open loop or closed loop) and varying levels of merchant acceptance have prompted companies to pivot their payment apps around certain types of transactions. As illustrated above, most of the apps or wallets focus on two or three types of payment transaction use cases. Consumers are forced to install multiple apps and wallets on their smartphones for different payment use cases or as they transact with different types of merchants. More often than not, many of the different apps and wallets often contain the same card or bank or payment account information. This overload of payment apps and wallets is often confusing to a consumer while at the same time they clog up storage and computing resources on a smartphone.

Smartphone Operating System (OS) and device companies like Google (Android), Apple or Samsung are in a unique position to help solve the app/wallet overload issue with their own wallets. These companies control the device and/or the operating system and can build payments and wallet functionality rooted at the OS level of a smartphone — something few other companies can do easily. A device/OS based wallet will come pre-installed and can be used by consumers to make payments after securely on-boarding their account information of whichever payment services they use.

The device/OS wallets can leverage Host Card Emulation to virtually and emulate any number of physical cards that can be used when a consumer needs to make an in-store payment. The device/OS wallets can also offer their functionality via APIs to other mobile apps or even to the browser on a smartphone to facilitate seamless payments from in-app or browser based transactions. These wallets can be used by a consumer for practically any payment use case because they have their own payments functionality in addition to being a managing layer encompassing other payment services.

A consumer does not have to download multiple apps / wallets for different use case requirements or for different merchants. While there are several existing payment service providers that offer similar APIs over the Internet, these are less efficient and slower to leverage when compared to the device/OS based wallet APIs which allow for different levels of required payments functionality to be pre-installed on the device enabling greater accessibility, efficiency and speed.

In fact, the advantages and strong value proposition of device/OS based wallets is a key driver for Google to announce its intention to launch its OS based Android Pay wallet/APIs, apart from its existing wallet app — Google Wallet. Apple, with its Apple Pay service and Samsung with its recent acquisition of mobile payments company LoopPay, also aim to further integrate payments into their devices. Amazon too developed its own smartphone Amazon Fire — to be able to control payments (a critical function of its e-commerce business) at the device level.

Yes, device/OS based wallets will take away from payment service companies much of the control of front end consumer touch points and primary access to transaction data . However, the wallets’ potential to jump start mobile payments growth and the resulting business gains should offset the disadvantages of companies giving up control of front end touch points and data.

Device/OS based mobile wallets can also potentially be leveraged to help solve other key issues. There are many competing point of sale (POS) technologies for mobile payments like NFC, QR codes, Barcodes, PINs and EMV chips for payments authentication and authorization. Currently different payment services use different technologies requiring merchants to install multiple POS machines which in turn drives up costs for merchants and hinders merchant adoption. By aggregating all payment accounts and services into the wallet, device/OS based mobile wallets can help drive standardization to the most effective POS technology. They can potentially even make the need for a separate POS redundant by building in POS technology into a smartphone thereby enabling true mobile to mobile transactions. Aggregation also allows for better security of all payment accounts at various stages like on-boarding, storage and operation as biometrics, encryption and tokenization can be deployed and managed at a more secure device/OS level.

Dan Leberman, Vice President at PayPal in an article on the slow rise of mobile payments says “…in order to change both consumer and merchant payments behavior, providers of payments products and services have to offer a step-change improvement over existing offerings — something far better, far easier, and widely available.” Device/OS based wallets certainly have the potential to help address key issues in mobile payments and may well offer the step-change improvement that is needed to accelerate the growth and adoption of mobile payments.

Additional Sources:

  1. Mobile Wallet Market Analysis — Carlisle & Gallagher Consulting Group