The mobile payments market ca be logically split into three major segments. Physical, mobile web browser or in-app mobile payments:
- Using a mobile phone as the physical form factor at the point of sale
(e.g. paying with Apple Pay in-store)
- Completing a payment within a mobile web browser
(e.g. shopping on amazon.com with a tablet)
- Transacting within a mobile app
(e.g. purchasing an airline ticket through the British Airways app)
As of 2016, the overwhelming majority of mobile payments fall into the latter two categories, often commingled under the ‘mobile commerce’ classification (see Figure 1). In-app mobile payments in particular are growing rapidly (50%+ CAGR) – writes Allan Reynolds, Consultant, First Annapolis.
First Annapolis recently estimated current in-app mobile payments volume and found it to be €60 and €125 billion in Europe and North America, respectively (see Figure 2). US consumers clearly set the trend for mobile usage, as of July 2016 spending half of their total ‘digital media’ time in mobile apps according to comScore. European markets trail on the adoption curve by 1-2 years, while China is also one of the highest in the world.
Figure 1: Estimated 2016 Splits of Mobile Payments by Use Case in Europe and North America
Figure 2: Estimated Sizing and Splits of Consumer Consumption in Europe and North America
While increasing smartphone penetration will lead to more ‘mobile payments’ across use cases, both consumers and merchants are increasingly embracing app commerce and in-app payments. In-app payments are cannibalizing other traditional types of payments as app commerce use cases displace physical transacting at the POS, traditional MOTO payments, and e-commerce. This gravitational shift is illustrated in Figure 3.
Figure 3: Migration Toward In-App Payment
Digital sectors lead the way for app commerce today as much of the e-commerce volumes in these sectors migrate into apps which offer greater feature/functionality than traditional internet-based environments. For example, Zynga, an online gaming company, noted that 76% of its Q1 2016 bookings came from a mobile device. Transportation and travel are also leading sectors for app commerce given the utility created by apps for people on the go (Uber being the classic example).
Growth in in-app payments will increasingly be fuelled by emerging in-store use cases as quick service restaurants drive increased efficiency with app-based ordering. Max, a Swedish burger chain, reports that half of all sales now come from digital channels, including self-checkout kiosks and the Max mobile app.
Digital channels are attractive because the customer experience is superior and produce higher average order sizes for Max. According to Max, the app and other digital channels have gone from being a support function to being the chain’s primary channel.
Retailers are still learning the ropes of app commerce; today, retail lags other sectors in app commerce penetration. We expect this to change, however, as apps can serve as a powerful platform for self-checkout as well as integrated loyalty.
Walmart, for example, is adding complimentary grocery pickup in several US markets, an order-in-advance model ideally suited for the mobile app. We expect that evolution of integrated commerce, loyalty, and payments to eventually accelerate growth of app commerce within the retail sector (as observed today at Starbucks).
Our estimates for the sector mix of in-app payments in 2016 and projected forward to 2020 is illustrated in Figure 4.
Figure 4: Estimated Sectors Splits for In-App Payments
We also expect regulation to be a catalyst for the growth of in-app payments in Europe. PSD2 intends to increase e-commerce security by requiring strong (two-factor) authentication. As the PSD2 current language is written (still in draft form), merchant card vaults, which drive a substantial portion of mobile commerce today, will not comply with strong authentication requirements for transactions that exceed €10.
Creating frictionless use cases for two-factor authentication will be challenging; however, biometric authentication (‘something you are’) on a smart phone (which can also hold an encryption key or ‘something you have’) is a compelling option. We expect smart phones to become the platform of choice for payment authentication and for apps to play a key role in enablement of payment use cases.
While the growth of the in-app mobile payments market is robust (we estimate growth at 50%+ and accelerating), there is still significant room for improving transaction outcomes and the quality of payment services supporting app commerce.
For one, fraud management solutions and services are typically not tailored for the unique requirements and advantages of the app environment. The nature of app commerce fraud is unique (e.g. repeated installation and wiping of the app in order to take advantage of sign-up offers) as are the tools available (e.g. precise geo-location and more complex device fingerprinting algorithms).
The customer experience is also often not optimally designed to be frictionless, forcing too many steps or even a 3D secure authentication in order to sign up. The development of mobile wallets and apps such as Apple Pay should help to streamline this experience. App commerce is simply not the same as e-commerce; rather it requires a unique set of payments capabilities to be optimized.
The acceleration of growth in app commerce will help to fuel the ongoing increase in mobile payments. Merchants and payment service providers must invest in mastering this new payments environment if they are to capitalize on this growth.