A couple of years ago, the global consulting firm McKinsey & Company put out a small report called “Innovation and Disruption in U.S. Merchant Payments.”
Here’s a quick summary on electronic and mobile payments:
- Electronic payment volume in the United States is at an all-time high, and will continue to grow by 7% each year, over a five year period (2013 – 2018).
- Increased demand for payment processing services will result in lower fees for merchants, and lower margins for processors.
- The bulk of the new processing revenue will come via software POS solutions instead of traditional payment terminals.
- The majority of this new growth will come from small and medium sized merchants.
Are Mobile Payments the Future?
What the report does not say is where, in terms of payment type, most of this growth is going to occur.
Will credit cards reign supreme? Will mobile payment solutions finally become a significant player? It’s a tough call.
On the one hand, the U.S. does often lead the way in technological innovation, and usually remains ahead of the pack in terms of shifts in popular culture. On the other hand, consumers in the country just have not taken to mobile payments the way Europe and Australia have.
In 2014, when McKinsey published its report, mobile payments existed only as a barely visible slice of the “preferred payment type” pie chart. The same website reported several months earlier that payment type was often determined by where the transaction was occurring.
No surprise, then, that shoppers used PayPal or similar services 22% of the time when shopping online. Take that transaction out to the real world, and mobile never tops more than 2%.
And no matter what chart you look at, you’ll see that credit and debit cards account for around 75% of purchases—another non-surprise, given that credit card debt is another way in which the United States leads the world. From all this, it certainly would seem that it’s going to be an uphill battle getting consumers to abandon their physical wallets for digital ones.
But here’s another statistic that should demonstrate that mobile payments’ big day in the U.S. is an inevitable: consumer spending with this payment type has roughly doubled every year since 2012.
The $1.89 billion spent with mobile technology in 2013 was a twofold factor increase over the previous year. In 2014, the number rose to $3.68 billion, and then again to $8.71 billion in 2015.
This year? It’s on pace to more than triple to $27.05 billion. The projections have mobile payments surpassing $200 billion by 2019. This is what economists refer to as “a freaking boatload of money.”
To understand what’s behind mobile’s sudden growth spurt, we need to go back to items 3 and 4 on my summary of the McKinsey report.
Cloud POS vs Legacy
Cloud-based point of sale is no longer a gamble for merchants; that honour now belongs to the traditional digital POS systems that cost merchants exorbitant amounts of time and money to install and maintain.
By next year, mobile POS will account for nearly half of all installed point of sale systems, around 46%. The POS providers who are leading the way in disrupting their market have been, just as McKinsey predicted, “increasingly relevant partners for the distribution of payments processing.”
Cloud computing makes it much easier to integrate services, and that is what the developers of POS have been doing with laser focus. They’ve capitalised on their technical advantage by partnering with major players in the processing space and offering their services right from their Checkout screens.
That they’ve also chosen to work with a variety mobile payments providers shouldn’t surprise anyone. Cloud computing is mobile computing, and these kinds of alternative payment types are the proverbial cherry on top of the POS sundae: it’s not needed to make the whole enterprise work, but you know something’s missing if it isn’t there.
The target audience for this new breed of POS consists of small- and medium-sized business—the very same businesses that until recently might not have been able to afford a modern day point of sale.
Not only is digital POS well within their reach, but cloud-based software’s inherent affinity with mobile payments makes it easier than ever for these merchants to accept a wider variety of payment types than even their Big Box competition can currently handle.
Because of this, small businesses are at the forefront of mobile payment adoption rate.
How Small Businesses Can Stay Competitive
The United States’ leading retailer, Wal-Mart, only recently released its own branded digital wallet app, while at the same time continuing its refusal to offer Apple Pay as an option.
Smaller businesses (and every business in the U.S. is smaller than Wal-Mart), don’t have the luxury of a business model built on a philosophy of “Our prices are so cheap, you’ll shop here whether you like it or not.”
These small businesses have to create new and unique ways to compete with the giants, and mobile payments are the best way to do that.
The first Millennials are all grown up and spending their own money, and they want to spend it in a way that feels natural to them. Choice, personalisation, and more intimate experiences are what they’re used to—they grew up using websites that could recommend products tailored to their tastes, paying with PayPal, and having products delivered right to their door.
That kind of marriage of technology and shopping is ingrained in this latest generation of consumers, and businesses that can’t meet their needs are going to suffer.
As they grow into the dominant consumer demographic, large businesses will, of course, have to follow suit in order to remain relevant. That’s going to be the tipping point for mobile payments becoming the preferred tender type in the United States.
The innovation in the payment space has already happened, and its ripple effects are becoming more noticeable. The question for businesses of all sizes, at this point, is:
Are you going to disrupt, or be disrupted?