RE:Mobile paymentFive From 15: The 2016 Payments Pacesetters Today is the one last day before we say bye-bye to 2015 and hello to a whole new year. As part of that annual rite of passage comes a host of rituals designed to bring good luck and prosperity to those who observe them. Never cry on New Years Day since its said that youll be destined to cry all year. In some countries, banging pots and pans and otherwise making loud noises are said to keep the evil spirits away. So is opening the doors and windows at the stroke of midnight. The Spanish eat 12 grapes at midnight one for each month. Sweet grapes portend a sweet year, sour grapes, not so much. My father used to eat herring at midnight which we kids thought was disgusting, but he was convinced brought him good luck (Im not so sure). Wearing new clothes on New Years Day means that the wearer will get lots more new clothes throughout the year a tradition clearly established with me in mind. Im sure you probably have a few rituals of your own. But if you want to start off 2016 on the right payments and commerce footing, heres another suggestion. Its not as noisy, is just as fashionable and doesnt require that you eat anything distasteful. Take a gander at my thoughts on the 5 things that happened in 2015 that could very well portend whats next in payments and commerce 2016. In no particular order. 1. PAYPAL IPO Carl Icahn turned out to be right PayPal and eBay are not better together, at least if youre PayPal. As an independent company now with its own management, strategy and ability to make decisions as a payments enabler not the payments arm of an online merchant PayPal is now free to pursue its agenda of powering the digital financial services ecosystem on a global scale. With nearly 180 million account holders in 203 countries, growing mobile volume, and a nice bank account with which to make strategic acquisitions or investments, in 2015 PayPal began to put to work a number of the acquisitions and assets that it acquired over the years: Bill Me Later, Braintree, Venmo and Xoom, to name but a few. For example, PayPal is using those capabilities to create sticky relationships with retailers large and small by being their go to for enabling transactional credit for its customers, working capital to grow their businesses, cross-border commerce without the acceptance hassle and one-touch commerce for their customers without having to do much to enable it. Its expanding its efforts to enable payments between people, including remittances, and businesses, including bill payment. It wants to be the powering platform for embedded payments wherever commerce happens to take consumers and businesses, which we saw PayPal do last year on social networks like Pinterest (4 out of the 5 retailers on Pinterest use PayPal to power their payment capabilities) and Braintree do for Facebook Messengers Uber payments capabilities. Theyve expanded merchant acceptance online and are experimenting with ways to mash up buy buttons and in-store payments, including schemes that do that inside of a merchants mobile app. PayPal also wants to serve as a digital banking alternative for those who lack access to existing financial services channels or satisfaction with those who may have banking relationships intact. All, of course, in the name of giving its users more places and reasons to use their PayPal accounts. In 2015, PayPal also proved wrong all the pundits who were convinced that PayPal would be an early and visible casualty of Apple Pay and confirmed the advantages of growing up digital in a world in which retail payments and financial services is now catching up with where PayPal started its journey commerce in a digital world. Over the last several years, weve seen commerce slowly move from physical to online, and more rapidly from online to mobile with the lines blurring a lot between those worlds. In 2016, well see those lines blur even further and even faster as end points proliferate to include any place where a consumer with an app and payments credentials can be connected to an Internet-enabled commerce experience. And, in those contextual environments, there are and will emerge a variety of players who want to dominate this new commerce ecosystem. It will be interesting to see where those lines and allegiances are drawn. 2. EMV BECAME A REALITY IN THE U.S. I wrote in 2014 that the Target Breach was the Black Swan that swam into payments that year. Absent that event, EMV was a global standard that was anything but certain in the U.S. But not for any failure to appreciate the value of or need for a global payments standard, but because merchants, in particular, didnt see the value of investing in new point of sale systems when EMV was about authenticating a consumer using a plastic card in a world going digital. Once the Target Breach happened though, it was game over. No CEO of a big retailer wanted to be the next Target. And even though everyone, including the networks, said that EMV wouldnt have prevented the Target breach, it didnt matter. The EMV train left the station and gained a huge head of steam in 2015 in the face of the liability shift which took place on Oct. 1, 2015. But as we turn the page to 2016, there remains a ton of progress to be made. Not surprisingly, issuers have been quick to issue new cards with chips the liability shift favors issuers who put chip cards in the hands of the consumer at the expense of merchants without EMV terminals. Estimates suggest that of the 1.2 billion cards in circulation in the U.S., about 400 million now have chips. Merchants, on the other hand, still seem reluctant and even schizophrenic with respect to EMV. Of the 12 million merchant terminals in the U.S., about 550,000 are said to be EMV-enabled. Lots of large merchants say theyll get around to it, but havent yet. Others have installed EMV terminals but havent turned them on, some who didnt want the new and slower experience to interfere with the holiday shopping season. Still others are focused on securing their online channels since that is where the fraud will move as it has in every other country EMV has been implemented. And, because thats where their businesses are headed, too. Other merchant categories, like restaurants and QSRs in particular, are quietly thumbing their noses at EMV entirely in favor of investing in better mobile experiences for their customers (like mobile order ahead and pay at the table functionality). SMBs (retail and services) are too focused on running their businesses and dont seem to care that much they think rightly or wrongly that theyre too small to be impacted. A recent survey of SMBs that we did with Sage Payments suggests that 64 percent say they have no plans to deploy EMV. All of which, of course, has implications for the fate of NFC. No EMV terminals means no NFC. And even EMV terminals dont automatically mean that NFC will be enabled. And, without mobile payments volume from NFC-enabled mobile payments schemes, merchants wont feel compelled to either invest or enable. In 2016, well watch merchants take stock of their own situations, take the lessons on board from those who have implemented EMV, and prioritize the investments in new technologies that help them both protect themselves and their consumers from fraud while future-proofing their businesses. Well watch to see if the EMV consumer experience prompts consumers to embrace mobile or issuers to invest in dual interface cards to entice tapping and not dipping. All merchants will eventually have EMV terminals. The unknown is whether merchants will accelerate their terminal refresh cycles because of EMV or whether theyll accelerate their investments in new environments because they want to reinvent the point of sale experience entirely which also means away from plastic cards. One place to watch for that is how merchants invest in 2016 to get their most loyal customers to use mobile apps for shopping and buying, including for making in-store purchases. Loyal customers drive a big chunk of merchant sales and persuading consumers to use mobile apps instead of plastic cards in the store could be a high priority for many reasons. Investments in new point of sale software and consumer incentives to move to mobile could trump investments in new point of sale hardware. 3. CYBERATTACKS CHANGE THE GAME OF DIGITAL IDENTITY The pace of EMV implementation in the U.S. notwithstanding, the relentless drumbeat of hacks and breaches that monopolized the news cycle in 2015 has only intensified the debate across the ecosystem about the best way to keep consumer data safe and access to that data secure. It was evident in 2015 that cybercriminals were becoming increasingly sophisticated and part of very well-organized businesses. They had the tools and the smarts to find and then exploit every last weak link to be found in our systems. Consumers became numb over the reports of merchants and businesses being hacked and if their own card hadnt been replaced at least once, just about every consumer knew at least someone whose card had been. But as serious a threat as card hacks are, consumers have been trained over the years that they are protected from a serious downside, even if their debit card is compromised. Card hacks are a nuisance to consumers, but they are protected 100 percent from catastrophic financial loss. Thats not the case when personal data is compromised, as we saw in 2015 with the hack of the governments Office of Personal Management, and health insurer, Anthem. That put a whole new spin on the downside of having a cyber crook steal a consumers identity, including their fingerprints, for their own nefarious purposes. This creates more than a little bit of uneasiness in a world in which data and commerce opportunities will become more and not less distributed across a variety of places, connected endpoints and databases. And in a world in which the security protocols that are being tightened in one area monitoring goods that enter the country, for example require that consumers give up more and more information in order to prove that they arent bad guys. I ordered something online over the holidays from a seller in the U.K. Thanks to the fact that I was dealing with a seller enabled for cross-border commerce, payment was easy. Getting the goods into the country wasnt. In order to clear customs, I had to fill out a form that asked for every piece of sensitive data a cyber crook would ever want: name, address, DOB, and SSN. If I wanted my stuff, I had no choice but to give it up. If Fed Ex gets hacked, Im hosed, along with everyone else whos filled out a similar form. So, the healthy dialogue that began in 2015 and will no doubt continue in 2016 is how to protect against the unlawful access to the sensitive personal data that is now or soon will be everywhere. But making it secure is only one part of the equation. Making it interoperable is another important yet challenging requirement. 4. APPLE PAY STAYS IN THE BASEMENT Tim Cook said that 2015 was to be the Year of Apple Pay and that it was. But perhaps for reasons different than those Cook had originally hoped. As Ive written multiple times, Apple Pays adoption has been hurt by a fundamental ignition flaw that plagued it from Day 1: it constrained both sides of its platform by imposing hardware and software requirements on merchants and consumers. That kept it from getting the critical mass it needed to give merchants or consumers an incentive to adopt and use. As our survey results reveal, consumers didnt buy their new iPhones to use them for payment (only 3 percent and the very last reason that people said motivated them to buy a new iPhone). And Apple had absolutely no control over merchants installing terminals with contactless capabilities they either had them or they didnt and they either would or would not install them at some point in the future. That also makes Apple Pay stuck right now in sort of a mobile payments purgatory usage at about 5 percent of all eligible users meaning those who have the right iPhones who use Apple Pay when they shop at merchants with NFC-enabled terminals. That turns out to be something like .022 percent of all retail sales not exactly enough to get anyone excited about or jump through hoops to enable Apple Pay at the physical point of sale. And, thats been pretty much the steady state of Apple over the last year. Not surprisingly, a couple of things happened in 2015 as a result. First, the competition became emboldened. Keep in mind that Apple Pay was supposed to be the death knell of anyone with existing mobile payments ambitions, and/or future dreams of them. Their lack of traction combined with Apple Pays business model, which takes a slice of issuer transaction fees, has given competitors the moxie to say to both issuers and consumers and merchants why not give us a shot? Samsung Pay advertises that its accepted everywhere and available on slick and slim new handsets. Android Pay is positioning itself as a platform for commerce. Google Wallet is available on iOS. Visa and MasterCard both launched express tokenization schemes, making it easier for consumers to provision issuers cards in Android Pay and Samsung Wallets. And speaking of the card networks, theyve begun to expand the acceptance of their own buy buttons, too recognizing that the fastest way to a consumers digital commerce heart isnt via an in-store mobile payments scheme but by making shopping online in any digital medium easier. They understand that the name of the game is acquiring consumers since thats what brings merchants sales and as fast and friction-free as possible. Apple Pay can only do so much at this point. Its put all of its cards on a consumer/merchant hardware-driven/operating systems based play. On the one hand, who can blame them? Weve written before that Apple customers are affluent and control about two-thirds of the spend in the U.S. But that spend can only translate to merchant sales if consumers can use Apple Pay at merchants. Thats the big rub now. The only way that Apple can acquire more consumers is to keep selling new iPhones. And convincing consumers that Apple Pay is worth using everywhere they shop. Thats the other big rub. Apple is going to have to put some of their own money behind that if they want that to happen. Its tough to get merchants to go to bat for Apple today unless they think that theyre going to get lots of customers. Remember last year this time when all you saw on TV were commercials for Apple Pay? Those were subsidized by the issuers. Its unlikely that Apple can go to that well again since all issuers have to show for that investment is a big hole in their marketing budget. Apple Pay is rumored to be contemplating its own P2P play in an effort to get more of its current iPhone 6/6S customers to use Apple Pay, but powering that will require a partner. Which might be the something to watch in 2016. American Express and Apple have been like two peas in a pod as Apple Pay has expanded around the world. In fact working with American Express is the only way that Apple Pay really has expanded around the world since in many countries its the only issuer willing to play ball and pony up basis points on transaction fees. Which, of course, raises its own set of problems with merchants who dont like paying more to accept Amex cards. It might be fun to watch what Apple and American Express do together in 2016. They sort of both need each other but for different reasons. Its a sure bet that American Express likely cant wait for 2015 to be over the year it saw its market cap lose about $27 billion. And, in 2014, before Apple Pay launched, I said that Apple, with its affluent customer base, could become the American Express of payments. With a market cap of $68 billion now, and a chance in acquisition philosophy, who knows, maybe Apple could make that happen. And, theyd still have about $150 billion in the bank 5. WALMART GETS INTO PAYMENTS AND MCX MAKES WHAT COULD BE ITS FINAL GASPS Walmarts announcement of Walmart Pay in December suggested two things: MCX is pretty close to dead and Walmart values sales more than it does saving money on interchange fees. Walmart, of course, didnt say that it wouldnt support MCX; in fact, they politely said they would continue to do so. But lets face it, if MCX were killing it in Columbus, thered be no reason to even think about any other mobile payments scheme. And with the news of Target possibly exploring its own mobile wallet well, it might be time to stick a fork in the MCX experiment. The launch of Walmart Pay also suggested that Walmart believed that the fastest way to getting mobile phones to be used as payments proxies in stores was to channel the payments and shopping habits that consumers had perfected on those phones. Which was to replicate the experience of shopping on Walmart.com. Sort of. Walmart Pays mobile payments innovation is to essentially enable a Walmart.com customer to enable a transaction at the physical point of sale, using a QR code and a scanner that already exists at checkout counters in their stores. Not to mention the 22 million people every month that comScore says use Walmart.com in a Walmart store. Thats a pretty big installed base to tap into, along with acceptance at all of its 4,000+ stores in the U.S. and the prospect of converting a few of the more than 100 million people who walk into one of those stores each week. 2015 hasnt exactly been one of Walmarts best years. It, like many other brick and mortar merchants, suffered at the hands of online merchants. And one in particular: Amazon. In October, Walmart warned the market that its profits wouldnt come in as promised as a result of investments in digital initiatives. That news caused Walmarts stock to suffer its steepest decline in 27 years, wiping out $21 billion in market cap. The irony, of course, to those sitting in Bentonville, is that this decline was precipitated on news related to profits a concept that Amazon has managed to skirt over the last 20 years without taking much of a hit from investors. Walmart says that it will have just about all of its stores equipped to accommodate Walmart Pay by the first half of 2016. With more than $36 million in sales every hour taking place at a Walmart store, and 90 percent of the American consuming public within 20 minutes of one, that will be an interesting piece of the commerce pie to watch move to digital, as it happens right inside of a physical Walmart store. Talk about blurring the lines. Walmart Pay starts its mobile payments life in a very unique and very unusual starting way: it has control of both sides of its platform consumers and merchants. Thats a huge advantage. But it still doesnt mean that its game over. Walmart Pay, like every other mobile payments player, still has its work cut out for it to get its platform ignited. Walmarts customers are unique. Many of them use EBT cards to buy groceries and those cant be put into a Walmart Pay app (yet). A lot of Walmarts customers still pay cash. So, starting with a scheme that tapped into the Walmart.com customers who consult the app inside the store is a pretty savvy starting point. Convincing those users to use the app to shop in store and more of them to get on board is Walmarts focus in 2016 and what to watch for. As well as the Chase Pay launch later in the year. With MCX gasping for air these days, and Chase Pay pinning its hopes on MCX as a launch partner it might be time for Chase Pay to call an audible. Speaking of which, next week, Ill share my 6 in 16: the 6 trends that I believe will reshape the game that the payments and commerce players will play next year. If you want some hints as to where I might be headed, check out my 2015 Payments By The Letter the 26 concepts that defined payments in 2015. Until then, all the best for a happy, healthy and prosperous 2016, with whatever ritual you use to welcome in a new year!