Paying for coffee, getting on the subway or splitting dinner with friends are everyday actions that can now be done with a mobile phone. And these mobile payments, or m-payments, are taking off. In 2015, close to half a trillion dollars were transacted globally using m-payments, and analysts predict that figure could double by 2019. Clearly, businesses that can successfully harness the potential of m-payments are on to a winning idea.
Below I suggest a simple framework to think about how m-payments can boost your business, along with the three keys to building a killer m-payment solution.
How mobile payments can boost your business
Many managers see the emergence of paying for goods and services via a mobile phone as a mere technological evolution, without further consequences (first customers used checks, then cards, now it’s m-payments.) Others acknowledge its transformational impact on society and economic activity in general, but believe it will not affect their industry because payment is not a key activity there. Still, others think that, by the time it becomes a widespread reality, they will be retired. Unfortunately, such thinking lacks imagination. Accept it or not, m-payment solutions are rapidly growing, and some of them are establishing relevant positions locally. Some, if not most, of the success stories so far have been championed by companies outside of the payment industry.
Let’s consider three main strategic objectives of m-payments that should be of interest to any business.
1. Improve productivity
Improving the way payment is performed can be crucial to boost business productivity. Take Starbucks’ pioneering mobile order-and-pay app, which has become a hit in the U.S., and which unlocks five productivity boosters:
• By processing payments faster, the customer throughput rate goes up, increasing sales per hour.
• As the cashier time per user goes down, so does the average wait, increasing customer satisfaction
• User payment and consumption data collected from the app can be used to customize promotions and discounts, increasing the average size of individual sales
• Thanks to the prepaid nature of the app count, the working capital requirements of the company are alleviated, decreasing financial expenses
• Due to all of the above, customers become more loyal, increasing customer lifetime value.
2. Generate new business
The ability to integrate m-payments into existing operations can create synergies that generate new revenue streams. A case study by my IESE colleagues Sandra Sieber and Alejandro Lago reveals how this can work. In 2007, Kenya’s leading mobile network operator, Safaricom, launched a mobile money transfer system called M-Pesa. Today more than two-thirds of Kenyans regularly use their phones to make or receive payments, according to Pew Global. With over 20 million registered customers, M-Pesa accounts for 86% of Safaricom’s users, 20% of Safaricom’s revenues and more than 40% of Kenya’s population.
3. Increase stickiness of core business
Including m-payment solutions in the service portfolio of a company can make sense – even when offered for free. When the payment system really adds value to the end user and is restricted to the user base of the company, strong network effects are created that can help reduce churn rates and increase customer retention. Because it is costlier for users to switch to the competition, the core service tends to stick longer, increasing customer lifetime value. For example, a company can use apps and payment tools to hook active users, expand its user base and pave the way for building a one-stop platform where ancillary services, such as food ordering or taxi hailing, can be linked.
Three keys to a killer app
Rolling out a new m-payment solution and taking it to a dominant position involves a lot more than just substituting a phone for a card. It requires successful intermediation between users and merchants – this is key. Traction will only be gained when the needs of these two stakeholders are addressed in a balanced way that makes it possible to match supply and demand: without a critical mass on the user side, it will be very unlikely that merchants sign up for the new service, and vice versa.
In order to assess which m-payment solution is best suited for your business, here are the three key success managers should concentrate on:
1. Address a clear business need/end-user pain point.
Without offering a clear value add to merchants and/or users, no new payment solution will fly over existing alternatives.
2. Use the right technology/platform.
If technology requirements are too burdensome, adoption will be limited. In contrast, if technology requirements are loosened too much, user experience will suffer.
3. Mobilize the ecosystem by removing business model uncertainties.
To gain traction quickly, the responsibilities and remunerations of all the players in the value chain need to be clearly defined.
Whoever is able to design, implement and roll out an m-payment solution delivering on all three dimensions – business need, technology and ecosystem mobilization – will have found a killer app. This is still to come, as there is not yet a dominant standard or widespread solution that has achieved global, relevant reach.
If you just deliver on the first dimension your solution will end up being a flop. Square Wallet learned this the hard way. The app provided what many considered to be the best ever in-person m-payment experience. So how can it be that this superb, frictionless payment experience was terminated in less than three years? The technology was overly engineered, and the ecosystem was not mobilized. The merchants had to invest heavily in dedicated infrastructure and indoor mobile coverage in order for their customers to be able to use Square Wallet, so most merchants refused to sign up, and that was the end of that.
If you address the first two points (clear business need combined with right technology/platform), you can usually be successful locally but will struggle to grow beyond that. This would apply to M-Pesa and WeChat. Though highly successfully, they may find it hard to grow beyond Kenya and China unless they change their business models to embrace partners outside the boundaries of their originating firm and/or country. The same goes for Starbucks: it remains to be seen whether its m-payment solution will have as much success outside the U.S.
When a solution that hits all three dimensions finally does come to fruition, its transformational impact will go far beyond the payments value chain: massive adoption could strengthen the competitive positions of companies in industries where payment is a non-core activity. The fact that Apple, Google and Samsung are gaining market share in this area has banks and retailers justifiably concerned, lest those tech intermediaries gain competitive advantage over them. Managers should think less about the technology per se and more about how the new functionalities of m-payments can give superior value to their customers. Businesses need to stay alert.
Eduard Calvo is an Associate Professor of Production, Technology and Operations Management at IESE Business School.