Mobile Payment's Birth Pangs

Mobile Payment's Birth Pangs

“In 2012, we will see large market launches of the digital wallet, as innovative grocers begin to use the mobile device and customized apps to differentiate their brand.” — Thomas D. Murphy, principal, North Highland

Last fall, many food retailers — without necessarily realizing it — began allowing shoppers to pay in stores with their mobile phones.

Those were retailers such as ShopRite [2], Meijer [3], Spartan [4], Supervalu [5], Food Lion [6] and Whole Foods [7] that have equipped their checkouts with NFC (near field communication)-enabled payment terminals in order to accept chip-bearing “contactless” credit cards; instead of swiping the cards, shoppers only need to place them on or near a terminal. The same NFC technology embedded in a smartphone allows shoppers to pay the same way with their phone.

Google Wallet plans to announce its first grocery partner this month.

That became a reality last September when Google launched its Google Wallet, an NFC-powered payment app, in partnership with Citi, MasterCard, First Data and Sprint. The system, limited so far to a single Android phone, debuted at 25 retailers — including Jamba Juice, Toys “R” Us, The Gap, Macy’s and American Eagle Outfitters — across five markets (New York, San Francisco, Los Angeles, Chicago and Washington, D.C.).

Google Wallet allows shoppers at these stores to not just make a PIN-protected payment, but to also redeem offers and get loyalty points by tapping a Samsung Nexus S 4G phone on an NFC-enabled terminal. Consumers fund purchases via a Citi MasterCard or a prepaid MasterCard encrypted and stored on a chip. The terminals require a software upgrade to handle the promotional part of the program.

But even outside of the five launch markets, Google Wallet can be used to pay for purchases — but not redeem offers or collect points — at thousands of other locations with NFC-equipped terminals, including the above-named grocers as well as drug chains like CVS and Walgreens, convenience and gas outlets like Sheetz and Sunoco and all McDonald’s restaurants. All told, 150,000 retail locations can process Google Wallet payments.

Any merchant that has a contactless reader “is almost surely taking mobile payments” based on Google Wallet, “though they may not know it,” said Paul Cwalina, senior vice president, First Data, Atlanta. First Data is Google Wallet’s Trusted Service Manager (TSM), a neutral middleman enabling credit card information to be encrypted and delivered to the chip on the mobile phone.

This month, Google Wallet plans to announce its first full-fledged grocery partner, which will accept both payments and promotions on Google Wallet, said Spencer Spinnell, director of emerging platforms for Google, San Francisco. The retailer will be one of the following chains affiliated with Google-owned Zave Networks: A&P [8], Cooke’s, Harris Teeter [9], Price Choppe [10]r and Bi-Lo [11], he said.

These retailers all offer online coupons provided through Zave Networks [12]; shoppers can click on these offers, download them to their loyalty card and redeem them easily at the POS. The grocer that will participate in Google Wallet will also enable shoppers to use Google Wallet to redeem their offers as well as pay for groceries at the POS. One or two other Zave-affiliated retailers may also join Google Wallet in the first quarter, said Spinnell.

Meanwhile, other payment-industry players such as PayPal and Visa are also exploring launches of mobile wallets. Perhaps the biggest example is Isis, an NFC-based mobile commerce platform being developed by three major mobile carriers, AT&T Mobility, T-Mobile USA and Verizon Wireless. All four major credit card companies — Visa, MasterCard, American Express and Discover — are aligned with Isis. In the first half of 2012, Isis will roll out its mobile payment program in Salt Lake City and Austin, Texas.

Plans for 2012

Mobile commerce has already generated billions in revenues as an extension of ecommerce, but remains in its infancy when it comes to making payments in stores. On the other hand, the advent of Google Wallet, along with other forays into mobile payment, has sparked interest among many food retailers in this payment process, even as they explore other mobile apps for list making, coupon dissemination and product location.

Stop & Shop's mobile app allows shoppers to scan prices and tally their order prior to paying conventionally. (Photo by ADAM HUNGER)

According to the Food Marketing Institute, 13.3% of surveyed food retailers plan to implement mobile commerce and payment at their stores in 2012, while another 40% are strongly considering it.

“In 2012, we will see large market launches of the digital wallet, as innovative grocers begin to use the mobile device and customized apps to differentiate their brand,” wrote Thomas D. Murphy, principal, Atlanta-based North Highland, and a former IT executive with Kroger, in an article published in SN last month.

Much of this will depend on the release and adoption of NFC-equipped smartphones as well as the continued installation of NFC-equipped payment terminals. “We see both on the consumer and merchant side NFC technology embedded and being a standard feature going forward,” said Mario Shiliashki, senior vice president and group head, US Emerging Payments, for MasterCard. “All the major phone manufacturers are working on models with NFC embedded. In the next few years it will be a standard feature like Bluetooth and WiFi.”

Some NFC-payment trials have already foundered. For example, Bling Nation, a tag-based mobile payment method used by Brookshire Grocery [13] in one store, suspended its service last June. “We believe mass market adoption of NFC payments is at least four years away,” said Sandy Shen, research director, Gartner, Stamford, Conn., last year. On the other hand, NFC payment has caught on abroad, notably in Japan, where it was initially employed in public transportation before being adopted in retail.

In this country, mass transit may also spark usage of mobile payment. In Salt Lake City, where Isis will launch this year, buses and trains are being equipped for NFC payment. NFC may also see early adoption in fast-turn retail environments like convenience stores and quick-service restaurants.

Not all mobile payment scenarios are linked to NFC technology. Several vendors working with food retailers, such as Modiv Media, Retalix and AisleBuyer, have developed mobile payment systems that initially use alternative technologies. A number of food retailers, notably Stop & Shop [14], have been laying the foundation for mobile payment by testing mobile apps that allow shoppers to scan and bag as they shop.

Perhaps the most prominent example of non-NFC mobile payment was the app rolled out last year by Seattle-based Starbucks Coffee to its 7,000 U.S. outlets, as well as about 2,000 Starbucks kiosks within Safeway [15] and Target [16] stores. The Starbucks app, for both iPhone and Android devices, allows Starbucks patrons to load value onto their loyalty card, track their progress in the rewards program, and pay by scanning the barcode on the iPhone at the register (as opposed to scanning the bar code on a plastic card, which is another option).

Last year, there were about 26 million mobile Starbucks transactions and $110.5 million reloaded onto Starbucks cards directly through the mobile app. The Starbucks app “is getting us comfortable with the idea of using phones for secure transactions,” said John Caron, senior vice president of marketing for Modiv Media, Quincy, Mass.

Awaiting Mobile Payment

Sheetz, Altoona, Pa., which operates more than 400 convenience stores, installed NFC payment terminals from Vivotech in 2005 chainwide at the POS and at gas pumps, and continues to put them in new stores, at a nominal incremental cost increase over conventional terminals, said Rich Steckroth, director of business development for Sheetz. (The chain now uses VeriFone devices.) A bigger outlay was upgrading the chain’s POS software to accommodate the contactless transactions, he added.

Vivotech’s payment terminals installed at many grocers accept contactless credit cards as well as Google Wallet payments.

Originally designed to accept contactless cards or other form factors (key fobs, watches and others), the new terminals are also geared to take NFC-based phone payments. “If someone walks in with Google Wallet, we can accept that payment,” said Steckroth. “But we are still sitting here waiting for mobile technology to catch on.” Sheetz has processed Google Wallet payments, though he could not say how many. He noted that Google Wallet promotions are not yet available in his market area.

Manhattan Fruit Exchange, a produce and cheese shop in New York’s Chelsea Market, is also able to accept Google Wallet payments, said Jennifer Latilla, store manager. But she acknowledged not having seen one since a launch event last September when Sprint gave out NFC disposable phones loaded with $5 in the wallet. “It was explained to us and we didn’t see any downfall to it,” she said. “It’s easy for us and for the customer.” The store’s payment terminals were already set up to take NFC payments.

While NFC phones, like contactless cards, speed up the checkout process, that alone is not likely to attract consumers. It’s the combination of payment and marketing features like targeted coupons and rewards that gives consumers “a much more compelling reason to use the phone as a contactless device,” noted George Zirkel, vice president, product team, First Data.

“If you look at convenience, credit cards are already convenient,” said Janet Hall, senior consultant for TMNG Global, Overland Park, Kan. “So that would not drive massive adoption. It’s really about mobile marketing.”

NFC phones will also allow shoppers to receive offers or recipe information by tapping on NFC-enabled signage in stores, said Stuart Taylor, vice president of product management and marketing for Vivotech, a Santa Clara, Calif.-based maker of NFC-enabled payment terminals. “The immediacy of the phone will make a difference.”

For retailers, the targeted marketing aspect is seen as enabling retailers to strengthen their relationship with consumers. “Supermarkets are seeing value beyond speed and convenience in an enhanced ability to interact with consumers,” said Shiliashki.

More than just targeted offers, which retailers can already deliver, the ability to make promotions location-specific may be the ultimate drawing card of mobile phones, observers say. Location-specific advertising and deals are among consumers’ top three interests for grocery mobile applications, along with receiving weekly sales updates and assistance in making grocery lists, according to FMI’s U.S. Grocery Shopper Trends 2011 report.

The mobile phone offers retailers “an opportunity to communicate with consumers wherever they are and be as personal as possible,” said Ravi Bagal, vice president of Verizon Retail & Distribution.

Google plans to launch location-aware offers in the first half of the year. “How much more value would an offer have if [a retailer] knew who you were as you walked into the store?” said Spinnell. Manhattan Fruit Exchange’s Latilla said her store plans to work with Google on sending “push notifications” to consumers’ phones alerting them to store discounts. The notifications would be sent when shoppers are within a specific radius of the store.

Although Google Wallet only incorporates MasterCard currently, it has struck agreements with other card brands (Visa, Amex, Discover) and expects to have them in the program “in early 2012,” said Spinnell. “Our technology is based on an open standard,” he said. In the meantime, shoppers can use Visa, Amex and Discover to load the prepaid MasterCard that works on Google Wallet.

Google Wallet is also “in conversations” with other carriers, such as Verizon, AT&T and T-Mobile, said Spinnell. “We know there will be multiple wallets and we believe consumers should be able to use the wallet with any carrier and [NFC-enabled] handset,” he said

Last year Verizon declined to allow Google Wallet to operate on its Galaxy Android phone, but Google Wallet is “working as hard as possible” to gain broad distribution for its service, said First Data’s Zirkel.

Accepting Google Wallet or other NFC transactions will require retailers to upgrade to NFC-enabled terminals meeting the 14443 payment standard set by ISO (International Organization for Standardization). The incremental cost of adding NFC functionality to a new payment terminal is less than 10%, said Vivotech’s Taylor. Future iterations of Google Wallet will require terminals that also meet the ISO 18092 standard governing NFC transmissions of digital promotions and receipts, said Taylor. “If I were a merchant contemplating a hardware upgrade, I’d want to future-proof my investment with an 18092 reader,” said Spinnell.

Google Wallet transactions, which are considered “card-present,” do not change the transaction fees for retailers. “Google Wallet leverages retailers’ existing payment infrastructure and doesn’t get in the middle of transactions,” said Spinnell. Interchange fees may even be lowered by the multiple alternatives that mobile payment is going to present, said Richard Mader, executive director, Association for Retail Technology Standards (ARTS).

For Google, the financial model is that consumers will use Google Wallet to pay for products and take advantage of offers advertised on Google’s search engine or presented as they shop.

Google Wallet’s security has been criticized for storing too much customer information unencrypted on the phone. However, Google stands by its security, pointing out that credit card information is stored in a “secure element” (a chip) in the phone that can’t be accessed. When shoppers put credit card information in their Google Wallet, it has to be “authenticated” by the TSM, noted Spinnell.

Completing the Loop

While Google Wallet touts both payment and promotions, some food retailers are taking a different approach to mobile shopping, starting with price scanning and totaling along with targeted ads in the lead-up to mobile payment. Others are focusing mainly on list-making and promotional apps.

The grocery retailer that is perhaps closest to completing the mobile shopping loop is Stop & Shop, Quincy, Mass. In 2011, beginning with a three-store test in June that by year’s end expanded to 48 stores, the Ahold USA subsidiary converted the functionality in its Scan It! in-store handheld device into a free app that could be downloaded to iPhone and Android devices.

Stop & Shop’s Modiv Media app scans products and keeps a running list, while receiving targeted promotions.

The Scan It! handheld device, available in about 350 Stop & Shop and Ahold USA subsidiary Giant-Landover, Md., stores, enables loyalty-card shoppers to scan-and-bag as they traverse the store, and to access targeted offers based on shopping history, store activity and store location. Both the handheld and mobile versions of Scan It! are based on software from Modiv Media.

“We’re hoping to have the mobile version of Scan It! in most of our [220 Scan It!] stores next year,” said Suzi Robinson, a spokeswoman for Stop & Shop’s New England division.

Giant-Landover stores have yet to start testing the mobile version, though they plan to do so in 2012, according to Modiv Media’s Caron. Another Ahold USA subsidiary, Giant Food Stores, Carlisle, Pa., will test the mobile app as well (though it has not yet deployed the Scan It! handheld device), he said. Another large grocery is testing Modiv Media’s mobile app in one store, said Caron.

The key advantage of a mobile version of the Scan It! app is that “people are more comfortable with their own devices” than with one provided by the store, said Robinson. For example, “people are used to taking photos with their phone” and can extend that to scanning bar codes, she said. The mobile app also offers shoppers at home the ability to check personalized offers based on historical behavior; other targeted offers based on store activity and location appear during the shopping trip.

The initial feedback from shoppers on the mobile app’s performance and convenience factor has been positive, said Robinson. She declined to provide figures on usage of the app (or the conversion from handheld device to mobile phone), though the total number of shoppers using the mobile app and handheld device is greater than the number using the handheld device alone. The chain has incented shoppers to use the mobile app with a promise of 100 gas points (equivalent to a 10-cent deduction on the price of gas at Shell stations).

For Stop & Shop — and any retailer adopting the system — the cost savings associated with a mobile app vs. a dedicated in-store device are considerable. According to Caron, the cost of equipping a store with the handheld device is $60,000 to $80,000 per store, while the cost of the mobile app hosted on the cloud is $3,000 to $5,000 per store.

Robinson said Scan It!’s ROI comes from increased shopper loyalty. Labor savings is “incidental,” she said, since extra cashier labor is reallocated to other parts of the store. Caron said the ROI comes from boosting a consumer’s “share of wallet” with the retailer.

The mobile Scan It! app, like the handheld version, receives and transmits information via the WiFi wireless signal in the store rather than a not-always-dependable cellular signal. If the mobile app should fail during the shopping trip, the data can be redirected to an in-store handheld device.

At the POS, a shopper scans a checkout bar code and the bar code on their loyalty card, which uploads the order to the POS for payment via standard methods. Spot audits, in which a random assortment of items is checked to confirm they were scanned by the shopper, are conducted by store personnel.

Modiv Media sees direct payment from the smartphone as the “inevitable” next step in the evolution of its mobile app, said Caron. In fact, Modiv is prototyping a mobile payment process — which will be in pilot by mid-2012 — that will piggyback on a retailer’s existing payment infrastructure.

A shopper would begin the payment process by scanning QR codes located throughout the store and overseen by surveillance cameras. “Then you would type in a PIN to authorize payment and pay, and a receipt would either print out or you would get a digital receipt,” he said. “You would show the receipt as you leave the store.” The shopper’s credit or debit card would be pre-registered on the system, and therefore not exposed during payment processing.

Modiv is waiting for credit card processing companies to be able to support its payment method as a transaction type, which Caron expects to be finalized in the second quarter of 2012. When NFC payment technology becomes widespread at the POS, Modiv’s app will support that as well. “We’re payment agnostic,” Caron said.

Because mobile payment would allow shoppers to pay anywhere in the store — similar to what is done today in Apple stores — the front end could evolve into a virtually checkout-less area where products can be stocked instead, said Caron. “How much more revenue could stores generate if the front-end were repurposed as shelf space?” he said, acknowledging that that scenario is still years away.

Stop & Shop is “on the list” of possible retailers who would test the mobile payment system, though the chain has not made a commitment, Caron said. The chain is aware that the Scan It! application could eventually be used to pay for a shopping order at the conclusion of a trip, rather than requiring a shopper to pay in a conventional manner. “The whole spirit of this is giving shoppers options to shop the way they want,” said Robinson. “So we are evaluating mobile payment as well, though it’s still down the road.” Because the app is linked to the store via a WiFi connection, securing a mobile payment transaction — preventing personal information from being accessed — would be a prime concern, she added.

In addition to payment, Modiv plans to add three other enhancements to its app in 2012: shopping lists, an integrated offer wallet, and coupon-sharing on Facebook. The list feature will enable shoppers to draw from disparate sources — a product bar code, items on the Stop & Shop website, a recipe on the Kraft website — and pull them together into a single list, organized according to a store’s layout; scanning an item in the store takes it off the list. CPG companies will be able to target offers based on what’s on the list. Similarly, the offer wallet allows the shopper to integrate offers from different websites or social media into one place.

The Facebook feature will enable shoppers to post a mobile offer on Facebook so that their friends can take advantage of it. Modiv Media will be able to track which friends redeemed the offer, showing “how valuable social media is in influencing behavior,” said Caron. Brands will be able to cap the number of times the offer is shared.

The new features — payment, list-making, Facebook sharing and offer wallet — will only be available on Modiv’s mobile app, not its in-store handheld device. It remains to be seen, Caron noted, whether there will be an advantage for Stop & Shop to retain the handheld option.

Israeli Program

Retalix, an Israeli retail technology company with U.S. offices in Plano, Texas, is introducing a mobile app called Mobile Shopper that does many of the same things as the Modiv mobile app. Its initial deployment is being tested by an Israeli food retailer that Retalix declined to identify.

Retalix’s Mobile Shopper, being tested by an Israeli grocer, will offer myriad functions, including lists, offers, loyalty and payment.

Like the Modiv app, the loyalty-card-based Retalix app will ultimately encompass all of the facets of a grocery shopping trip, from planning to payment. The initial release includes two of those components, offers (general and targeted) and list building. Shoppers can populate the list with offers and scanned products, and by searching the product catalog.

The third component of the app will be self-scanning and the fourth, checkout. The latter will be available in two options, paying strictly via the phone and generating an electronic receipt (thereby facilitating convenience transactions), or paying at a regular POS with the phone. In either case, the payment goes through the phone’s PIN-protected e-wallet where a shopper would register her credit or debit card; Retalix offers its own e-wallet, and plans to make other, NFC-based e-wallets compatible with its system. “We won’t dictate which e-wallet to use,” said Gil Roth, executive vice president of products portfolio strategy for Retalix.

Like other vendors, Retalix takes the position that mobile payment in the grocery environment will work better in concert with other shopping functions than by itself. “Overall, the game in mobile will be creating an application that will become [the consumer’s] companion for shopping rather than an app that does one thing,” said Roth. On the other hand, Retalix has developed its app so that each function could be used separately by the consumer.

Roth doesn’t expect NFC to be widely available on phones and POS terminals for three to five years. In the meantime, Retalix developed other ways to create an encrypted link between a phone and the POS via WiFi or a cellular network: The shopper identifies on the phone which register she is near; the shopper scans a QR code on the register, or the shopper reads a code from the phone to the cashier, who types it into the POS. (The Israeli retailer will use the last method along with a 3G amplifier to augment the 3G network, and it will not allow shoppers to pay only on their phones, said Roth.) In any case, the order is transferred to the phone, which pays via a pre-registered card.

All of the transaction data associated with the app are hosted on the store’s Retalix POS server (it is not yet designed for other POS systems), which can reside in the store or on the cloud; the phone is strictly a graphical user interface (GUI). If a phone loses power, an order can continue at a POS or on a mobile in-store device if that is available. The system has a cloud-based gateway that allows a secure connection between the phone and the POS server and “prevents abuse of the server,” said Roth.

Roth declined to provide the cost of the mobile shopper app for the retailer, but said that the ROI would come from at two factors: the ability to get information about shoppers that would in turn allow retailers to deliver basket-expanding personalized offers; and the enhanced loyalty that comes from improving the shopping experience. Retailers could also incur saving through reduced labor and fewer checkout lanes.

Roth takes the view that mobile payment will eventually reduce the interchange fees retailers pay per transaction. “We believe the entrance of new players will reduce transaction fees that U.S. retailers pay, which are quite high compared to what Europeans pay.”

Another company offering retailers a mobile app that includes payment is Boston-based AisleBuyer. To date, the payment app is being used by Magic Beans, a five-store Boston-based chain of toy and baby-gear stores. The app allows shoppers to pay by keying in a credit card number (a new feature will allow taking a picture of the card) and the card’s three-digit CVB code. An alternative “suspend-and-resume” method, more suitable for supermarkets, enables shoppers to scan and tally their order, then scan a QR code at a register and transfer the order to the POS. Weighable produce items could then be added to the order and the shopper would pay in a conventional manner, and the transaction would be transferred back to the phone as a digital receipt.

AisleBuyer’s supermarket app also enables shoppers to access nutrition information and customer reviews as well as receive personalized coupons and offers. In addition, shoppers can compile shopping lists and access a store locator. The app also includes localized digital circulars and targeted coupons based on the nearest store location. Last November, Big Y Foods [17], Springfield, Mass., announced it would deploy the app without the self-checkout feature.

An NFC-equipped phone would work with the AisleBuyer system, allowing the shopper to complete the transaction by tapping the phone on an NFC reader, said Andrew Paradise, the firm’s chief executive officer.

Last month AisleBuyer announced a new mobile feature that would permit brands to deliver targeted promotions goods to shoppers during the shopping trip in response to what is being scanned; retailers would get a share of the ad revenue.

Another company working around the edges of mobile scanning and payment is Mercatus Technologies, Toronto. Mercatus’s iPhone app, offered by Food Lion, allows shoppers to browse weekly specials, manage their shopping list, find recipes or simply locate the closest Food Lion store, while syncing to information on a chain’s website. In late October, Mercatus announced the addition of NFC and QR code technologies to its mobile app, giving consumers access to immediate information about products as well as the potential to pay with their phones.

Price Chopper Supermarkets, Schenectady, N.Y., said last fall that it plans to launch its first mobile-phone application and an enhanced website based on Mercatus’ “Smart Shopping Technology.” Greg Zeh, the 128-store chain’s chief information officer, said Price Chopper expected to launch the mobile applications prior to the end of its current fiscal year in April. The initial launch of the mobile app will include shopping lists synchronized between the chain’s website and mobile phone, store locations, recipes and other product information. “Our roadmap includes additional features that will meet the demands of our shoppers,” said Zeh.

The Mercatus platform provides Price Chopper with the ability “to expand the same experiences” to kiosks, shopping cart tablets and other customer digital interactions, Zeh said. Mercatus’s tablet technology has the capacity to do product price scanning and tallying, though there are no current tablet deployments, Lucy Trinh, creative director for Mercatus, said last October. The mobile app was “not far off” from having price scanning capability, she added.

Kroger also ventured into the mobile scanning world last year. The company tested a handheld shopping device called PAL (personal assistant and liaison) that is similar in functionality to the Stop & Shop/Giant Scan It! handheld scanner. The device was used in a store in Cold Spring, Ky., and was added to one in Loveland, Ohio, according to Kypost.com. Not unlike Stop & Shop, Kroger plans to master a personal shopping platform under its control to get “a leg up on the emerging world of the smartphone,” Brett Bonner, senior director at Kroger, said last year at the U Connect Live conference.

Meanwhile, Wal-Mart Stores [18], through its Silicon Valley-based WalmartLabs, launched new functions for its iPhone and iPad apps in November. The iPhone app includes voice-enabled shopping lists, budgeting tools that calculate the total price as items are added to a list, manufacturer coupons, product information, and (in some stores) a product locator. The iPad app includes the ability to purchase items online as well as browse inventory in a store and look at extended online inventory.

Verizon’s Bagal urges retailers to experiment with the new mobile technologies. “Now is the time to learn,” he said. “It’s going to be on top of us before we know it.”