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Will Offline Retailers Drive Mobile Payments Adoption?

By January 23, 2014Guest blog

mondato logoHow can retailers integrate digital tools to improve their businesses, compete with online retailers and drive consumer adoption of mobile payments? Mobile financial services experts Mondato shed light on the matter in this guest post from their blog.

E-commerce once posed a significant threat to brick-and-mortar retailers, prying customers away from stores by offering convenient, online retail options. Increasingly, however, offline retailers are embracing digital tools as an opportunity to improve their businesses and compete with online retailers. As retailers integrate mobile and online platforms into their operations, can they drive consumer adoption of mobile payments?

First Merchants, Then Consumers – Cracking the Chicken-and-Egg Problem

Adoption of mobile payments has long been paralyzed by a chicken-and-egg paradox – merchants are hesitant to invest in mobile channels without assurance of consumer adoption, and consumers cannot use platforms that merchants have not yet implemented.  But as brick-and-mortar retailers look for ways to combat showrooming and compete with e- retailers, they may have an incentive to lead the drive towards mass adoption of mobile payments. For offline retailers, mobile offers the opportunity to enhance the consumer experience through targeted discounts and streamlined purchasing, fostering the conversion of foot traffic into sales.

Retailers can no longer afford to exist outside of the digital realm, or they will be edged out of business by retailers that successfully bridge the online and offline worlds. Among the many lists of predictions for mobile commerce in 2014, there was one common refrain: retailers will play an increasingly important role in spurring consumer adoption of mobile payments. A list of payments and commerce predictions from Forbes, for example, suggests that a “small number of big-box retailers will likely lead the charge” towards widespread mobile commerce.

Can retailer-led mobile commerce succeed where other solutions have failed? Mobile wallets developed by technology providers, mobile operators or cross-industry alliances (think: O2 Wallet, Google Wallet, Isis) have largely failed to gain traction among either merchants or consumers. These solutions face the double-challenge of convincing both sides of the transaction equation to adopt their service. Retailer-led solutions, however, may hold the key to cracking the chicken-and-egg issue facing mobile payments, as they already solve one side of problem: merchant adoption. Large retailers further have the advantages of brand awareness and high transaction volumes, as well as an incentive to capture consumer data and enhance the consumer experience both in stores and online.

Retailers Join Forces to Spur Adoption

In the US, a consortium of large retailers banded together in 2012 with the shared mission of developing a mobile payment solution that benefits both merchants and consumers. Merchant Customer Exchange (MCX) comprises some of the largest retailers in the US, including Wal-Mart and Target, and aims to build a highly-customizable, lower-cost payments infrastructure that bypasses card networks. According to Denee Carrington of Forrester Research, this means that MCX participants will be able to avoid paying card network interchange fees – offering a strong value proposition for merchants to join the network.

A key advantage of the MCX joint venture, which has yet to set a launch date, is its potential to combat the excessive fragmentation of the mobile payments industry. Currently, the retail ecosystem is rife with different merchants offering different m-commerce platforms, leaving consumers wondering which platform they should use at which location. This chaos has turned many consumers away from mobile payments and towards cash or cards, which are more likely to be accepted across an array of retailers. According to Dodd Roberts of MCX, “the (mobile payments) market will take off once a customer can pump gas, buy groceries, pick up a prescription and go to the mall while paying the same way at all of those locations.” With members that span nearly every retail sector, MCX has the potential to enable this ubiquitous merchant acceptance and thus offer a solution that is useful for consumers.

Mobile Shopping blog pic2How Can Retailers Go Mobile?

There is no doubt that shifting to mobile is a necessary step in the evolution of brick-and-mortar retailers, but this transition is not without friction and challenges. Developing a successful mobile strategy requires retailers to carefully consider many aspects of the consumer experience, from loyalty and discounts to the transaction itself.

One of the primary challenges facing retailers as they shift to mobile is the technology to be deployed. From NFC and cloud-based solutions to mobile point-of-sales that enable card transactions, identifying the right technology for a specific retailer can be difficult.  A recent GSMA report on Mobile Commerce in Retail stresses the need for mobile commerce platforms that seamlessly integrate into existing payment processes, offer a consistent experience across multiple channels, and support interoperability between mobile devices and operators (page 13). Carrington predicts that omnichannel wallets, which enable e-commerce, m-commerce and in-store proximity payments, will show the fastest growth moving forward. (See: Can Digital Wallets Save Brick-and-Mortar Retail?)

Another key consideration for retailers is the potential security risks associated with mobile payments, as liability for security breaches often falls upon the retailer (as opposed to the consumer or payment processor). The GSMA report notes that m-commerce services need to be “secure and underpinned by robust identity management solutions to protect consumers, banks, payment schemes and retailers” (page 13). Recent consumer data breaches at leading retailers such as Target, Neiman Marcus and others, have made ensuring security on the retailer end even more essential. In the case of Target, the giant retailer could be liable for up to $3.6 billion, including potential class action lawsuits, civil fines and the added cost of ensuring payment infrastructure is secure moving forward. Though the Target breach only affected consumers using credit and debit cards at the point-of-sale, retailers may fear that new mobile commerce platforms will leave them vulnerable to similar attacks, or worse. In light of an ongoing debate regarding whether the liability for such breaches falls upon retailers or banks, there may be an understandable hesitance among retailers to integrate m-commerce platforms.

Other potential challenges raised in the GSMA report include the need to educate both store staff and consumers on using the mobile commerce platforms, in order to ensure seamless and consistent consumer experiences. Further, identifying a business model that benefits retailers, services providers and mobile operators, among other potential stakeholders, can be tricky. It is in this area that MCX presents a clear advantage, as it is wholly owned by retailers and creates a direct connection between merchants and the customers’ funding source, thereby limiting the number of ‘mouths at the table.’

For retailers, embracing digital commerce channels is a necessary means of survival in a world where the lines between online and offline commerce are increasingly blurred. In an industry fraught with segmentation and facing limited consumer appeal, retailer-led solutions have the potential to drive adoption from both merchants and consumers. However, realizing this goal will require retailers and other mobile commerce stakeholders to address the above challenges and establish a coordinated path forward.

This article first appeared on the Mondato blog. Mondato is a boutique management consultancy specializing in commercial and operational support for the mobile financial services industry. Learn more by visiting their website and follow them on Twitter.

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