How Apple Pay and mobile wallets will transform shopping

When the Mondex card launched a trial in Swindon in the mid 1990s, its pledge to create a cashless society was routinely mocked by journalists and consumers alike, despite backing from NatWest bank.

The ahead-of-its-time Mondex aimed to replace coins with a chip-based card and keyring reader for checking bank balances but it did not catch on.

Yet fast-forward 20 years and contactless payments are increasingly replacing cash, with ‘mobile wallet’ services such as Apple Pay, Android Pay and Samsung Pay all launching this year to a ready-made audience of millions of smartphone users. Apple will be first to market this month. Barclaycard, meanwhile, has just launched three wearable contactless payment devices through its bPay brand. All of these options allow consumers to pay for goods through near field communication (NFC) technology, by swiping their device in front of a card reader.

“NFC payment technology isn’t just a gimmick anymore. The move to contactless is now a real permanent shift,” says Jeremy Nicholds, executive director for mobile at Visa Europe.

Becoming mainstream

Visa, which is partnering with both Apple Pay and Android Pay, believes mobile contactless could soon replace cash and cards completely, with the card giant recently predicting that UK mobile payments will reach £1.2bn a week and be regularly used by 60% of Brits by 2020.

Nicholds adds: “When Transport for London moved away from paper and made everything contactless on the London Underground, it was a very influential move. I think Apple Pay will be the same sort of catalyst.”

The Californian tech brand’s decision to bring Apple Pay across the Atlantic is not surprising. After all, total contactless spend trebled to £2.32bn – spread across  319 million transactions – in 2014, according to the UK Cards Association (UKCA), which also says the number of contactless cards in circulation rose buy over 50% last year.

With support from the UK’s eight major banks and 250,000 retail locations ready from launch, Apple Pay is unlikely to replicate the fate of Mondex any time soon.

However, Richard Koch, head of policy at the UKCA,whose members are card issuers such as banks, doe not necessarily believe Apple Pay and Android Pay will be instant successes either.

“You have to remember that this will be available only to iPhone 6 users, so mass adoption won’t come straight away,” he says. “But even if Apple only bring something slightly different to the table, we’re confident the masses will jump onto the bandwagon bit by bit. We are in deep discussions to put contactless throughout the UK’s transport network – taxis, car parks – so schemes like that will be as influential as Apple Pay.”

Koch says there is already a mini war forming among the smartphone brands, warning: “The downside – and we have tried to get people together to work out a universal framework – is if everyone goes off and does their own thing, it is like having 15 different cards in your wallet all over again.”

Samsung Pay is indeed looking to do its own thing, hoping that by working with magnetic strip readers – older technology than NFC, which is more widely available in retail stores in the US in particular – it will be attractive to more brands. Launching on Galaxy smartphones in the US and Korea this summer, followed by Europe, it has already teamed up with Visa and MasterCard.

Samsung’s head of retail in Europe Vincent Slevin claims Samsung Pay will shape the entire shopping experience and not just payment.

“The possibilities are endless. We’re talking about using it to attract people into store, then enhancing their experience and how the shop is operated, before moving to the transaction itself,” he says. “The key is this will reduce transaction times, which in turn will shorten queues. Handling cash is also becoming redundant for retailers as it’s too expensive. Samsung Pay means consumers aren’t limited to what’s in their wallet and retailers spend less time sorting out queues and more time selling. I don’t think brands can afford to ignore it as there’s a real cost associated with missing out.”

Huw Davies, head of emerging payments at MasterCard, agrees that mobile contactless will become more than a digital wallet.

“If you can create a safe environment and then have players like Apple and Samsung, you have the conditions for this to absolutely fly,” he explains. “Last year, we worked with Wagamama to solve its problem of diners waiting up to  20 minutes to pay after finishing their meals and provided  a solution where diners can pay whenever they want. Apple  and Samsung can’t soley focus on payment solutions, this has to help with engagement too and I’m sure it will do.”

Simplifying loyalty

Meanwhile, Rob Harper, director of mobile commerce at PayPal believes loyalty programmes are also ripe for opportunities.

“At the moment, you are choosing between five or six loyalty cards and hoping you can find that paper voucher that was in your pocket,” he says. “I think a major opportunity is to combine all those elements into a single tap to pay at a counter or on a mobile.”

PayPal’s Braintree business already powers the contactless payment technology for the likes of Uber. It will soon roll out contactless pay solutions across Shell petrol garages,
after a successful trial that enabled car owners to pay for petrol on their phones without entering a station. But at competitor Visa, Nicholds believes PayPal could struggle in the future.

He says: “For PayPal there is a clear threat from rivals such as Apple and Google coming into their space. We face a more interesting and competitive payments market but PayPal definitely has a fight on its hands and a few new rivals.”

Koch at the UKCA, of which PayPal is not a member, agrees: “What Visa and MasterCard are trying to subtly do is occupy the hill by directly partnering with these devices and it’s sensible. To some extent there is a first-mover advantage to someone coming up with a cohesive NFC proposition. I’m sure PayPal is concerned.”

However, Harper insists PayPal’s security focused positioning will ensure that it remains a key player. “We helped create the idea of paying online 15 years ago and then mobile pay, and we will continue to be relevant in helping consumers and businesses alike,” he responds defiantly.

“We will be launching a ‘PayPal Here’ contactless pin reader later this year but contactless shouldn’t just serve major  high street chains; PayPal is making sure it benefits everyone from cab drivers to fruit stalls. I think there’s a real trust from businesses and consumers in the safety of PayPal payments at the point of purchase that others don’t have.”

Increasing shopping spend

With such wide choice coming to the market, Pret A Manger is one brand hoping to remain ahead of the curve. Nearly 60% of the mostly London-based food retailer’s card payments are through contactless and Pret was announced as one of the first UK brands to sign up to Apple Pay.

“I don’t think this will suddenly dwarf conventional payments, but then again we didn’t think half of our card transactions would be contactless when we first launched it in Pret five years ago,” says group marketing director Mark Palmer. “The key is it is simple to use and allows our shops to be speedier when it comes to service and queues.”

In the US, Whole Foods saw a 400% increase in mobile payments after introducing Apple Pay, while Panera Bread says 80% of mobile transactions are coming from the pay service.

Kester Dobson, head of technology at coffee chain Harris + Hoole, says the UK will take to it even quicker. “The UK should see a faster adoption of in-store Apple Pay than the US because we already have the NFC infrastructure to support the payments.” 

He adds: “Apple Pay and Android Pay are the mobile wallets we’ve been waiting for, so while they may not affect our loyalty programme directly, they enable mobile retail experiences to be better than they are today. This, in turn, presents an opportunity for retailers to encourage more loyal customers. Plastic cards will start to scale back as we get more used to electronic representations of credit and debit cards.”

The biggest boon to brands will be from contactless encouraging higher average spend, says Visa’s Nicholds. “The benefit of mobile over cash is you’re not restricted to the money in your wallet, so in our experience consumers are likely to spend more.”

Visa has 2.5 million contactless terminals across Europe, a figure that Nicholds says will reach over 10 million by 2020. However, he believes the conversation will soon switch from Apple Pay to the internet of things. “Whether payment functionality comes into cars or a fridge that replenishes itself, this will keep evolving. The whole wearables move is interesting as it’s even more convenient than paying by using a smartphone – I can only see it growing.”