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Here's what happened in payments this week

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BII Likely Mobile Wallet Adopters Preferred Providers

MOBILE WALLET ADOPTERS LIKELY TO OPT FOR PAYPAL OVER OTHER PROVIDERS: Apple and Google have had the spotlight this year in mobile payments, but a new survey from CMB shows that new mobile wallet adopters will opt for PayPal. The survey of 1,716 US adults was conducted from late March through early April.

  • PayPal came out ahead of other brands: 71% of likely mobile wallet adopters, or consumers who haven’t made an in-store mobile payment but plan to make one in the next six months, selected PayPal as their preferred provider.
  • Apple, Amazon and Google followed closely behind: A slight majority of this constituent said they’d use Apple, followed by 49% and 48% for Amazon and Google, respectively.
  • Microsoft settled near the bottom at 34%. The company hasn’t made many vigorous pushes into mobile payments but recently filed for a money transmitter licence in Idaho, and is working to acquire licenses in all 50 states.
Bii percentage of customers planning to use apple pay paypal 150423 3

The survey results show that PayPal can gain even more customers as the mobile wallet ecosystem grows. A recent survey from 451 Research gave the opposite result — that Apple Pay, a newer entrant to the ecosystem, is growing its user base at the expense of PayPal. In the survey, 45% of consumers said they planned to make a payment with Apple Pay, compared to just 28% with PayPal. Last year, the reverse was true — 54% said PayPal, and 19% chose Apple Pay.

It’s very likely that Apple Pay has eroded PayPal’s wallet business, but it’s clear from the new survey that PayPal still has a highly visible brand, which it should be able to leverage as it works to create new mobile payment products.

PayPal’s foray into mobile payments has seen mixed results — it’s built successful in-app and peer-to-peer transfer payment products, but its in-store efforts have been largely fruitless. The firm recently acquired Paydiant, a mobile wallet and loyalty platform used by restaurants, and will offer Paydiant’s wallet as a white label product.

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LATEST APPLE PAY DEVELOPMENTS: Last week, Apple announced a number of forthcoming changes to Apple Pay, including synchronisation with rewards cards and its launch in the UK next month. Here are the latest developments:

  • Global Payments, an international payments processor, announced that it will give its merchants in the UK the ability to accept Apple Pay payments, presumably by supplying them with NFC terminals that can also accept tokens. Global Payments claims a 20% share of the UK’s total transaction volume, according to the company. Although UK merchants are fairly excited about Apple Pay, consumer demand in the country is far lower, according to a recent survey (see chart).
  • VeriFone, another prominent payments processor, will accept Apple Pay loyalty card transactions on select NFC terminals.
  • The early retail partners that will issue loyalty cards in Apple Pay include Walgreens, Coca-Cola, Dunkin’ Doughnuts, Panera Bread and Whole Foods. Not only do these retailers have robust loyalty programs, but some of them already see the highest in-store Apple Pay activity. Whole Foods, for instance, has consistently seen the most Apple Pay traffic in its stores, boasting 3.3 million Apple Pay transactions in Q1 2015, which represents about 3.2% of Whole Foods’ total in-store sales, according to our analysis. The rewards integration could intensify Apple Pay activity in Whole Foods. Dunkin’ Doughnuts, meanwhile, has a thriving mobile payments platform of its own, and mobile-savvy customers would likely be open to using their rewards cards in Apple Pay.

Loyalty could ultimately drive the success of Apple Pay because it helps incentivise repeat usage. For instance, rewards and loyalty have been crucial to Starbucks’ success with its mobile payments app, which now registers 8 million transactions per week.

Bii apple pay enthusiasm gap uk

STARBUCKS’ MOBILE ORDER-AHEAD PLATFORM BRANCHING OUT TO NEW STATES: Mobile Order & Pay, Starbucks’ order-ahead platform that was originally piloted in late 2014, is expanding to 21 more US states, meaning that the feature will be available in more than 4,000 Starbucks stores. The feature is only available for iOS as of now, but the company plans to launch an Android version later this year. Starbucks introduced Mobile Order & Pay to the Pacific Northwest region in March, and the platform’s continual expansion is an indicator that it’s been a hit with consumers in the test markets.

Mobile Order & Pay is an integrated service in Starbucks’ pre-existing app that allows customers to order coffee ahead of time and pick it up at a specific location. They make their purchases in the app, so they can skip the line when they walk in.

Starbucks expects Mobile Order & Pay to “increase speed of service, drive incremental transactions and increase throughput” in its stores. This is because order details are printed on a sticker that can easily be attached to a coffee cup, cutting down the time of the checkout process. This improved operational process will enable baristas to make more orders in less time and could result in higher sales for Starbucks.

Many Starbucks customers likely favour convenience and therefore might adopt the app’s order-ahead feature quickly. And, since these orders are processed through the app, mobile could take an even greater share of Starbucks sales. Currently, mobile represents 18% of US in-store Starbucks sales (see chart).

Starbucks Mobile Transactions

MORE DETAILS ON GOLDMAN SACHS’ NEW LENDING INITIATIVE: Last month, Goldman Sachs announced plans to create its own digital lending unit, hiring Harit Talwar from Discover to head the initiative. Here’s the latest on Goldman’s foray into personal lending, courtesy of The New York Times:

  • Loan applications will flow through an app or website and will likely be disbursed to borrowers on a type of prepaid card.
  • The loans would be funded by Goldman Sachs using the bank’s certificates of deposit (CDs) on file. This differentiates the firm from many nascent alternative lending startups, which usually mediate interactions between borrowers and investors, but don’t originate the loans themselves.
  • The company hasn’t decided if it will brand the lending division under its current name or re-brand it under a new one.
  • The firm plans to begin issuing loans by the beginning of 2016, and it will issue loans in the range of $US15,000 to $US20,000 to ordinary US consumers. Presumably, the loans would be marketed either as alternatives to a credit card or as loans for a larger undertaking, e.g. a home improvement project.

There are two big factors that will determine the success of Goldman’s lending program:

  • Brand image: Goldman Sachs has specialised in high net-worth and investment banking for many decades and hasn’t built a strong rapport with Main Street consumers. Therefore, the average US consumer might not be comfortable visiting Goldman Sachs for a loan. If Goldman re-brands its lending unit to establish separation from the core brand, consumers could be more open to the program.
  • Interest rates: The digital lending industry is filled with online marketplaces that can offer loans at below-average rates because they don’t incur as many regulatory costs as banks. Given that Goldman Sachs is a bank and will be issuing the loans itself, it’s unclear if it will benefit from as many cost savings as existing online marketplaces, meaning it might not be able to offer interest rates at the same level. This could discourage borrowers from going to Goldman over a startup like Prosper or Lending Club.

Banks have approached the emergence of alternative lending startups very differently. Some, like Goldman Sachs, are competing directly with them, while others, like JPMorgan, are stamping their approval and investing heavy amounts of money into the startups, believing they can benefit the personal finance ecosystem.

Despite these opposing views, banks aren’t overly threatened by digital lending startups — only 7% of banks in a recent survey said P2P lenders posed the greatest threat to their business (see chart). And it’s still early days for alternative lending; P2P lending companies in the US originated $US6.6 billion in loans last year, however, the total value of revolving US consumer debit was about $US800 billion.

New Entrants Posing Greatest Threat To Banks

STRIPE ENTERING MORE INTERNATIONAL MARKETS: Payment gateway provider Stripe is expanding to Denmark, Norway, Sweden, and Finland next week, according to co-founder John Collison, speaking at the MoneyConf in Belfast. The company will now have operations in a total of 20 countries.

Collison also stated that his company is really focused on mobile commerce, mainly because that channel generates lots of traffic. However, he also mentioned that conversion rates are still low. These two trends together means that potential sales via mobile are far greater than actual sales.

This gap will likely close over time, as mobile in-app payments become more frictionless; Stripe could see more transactions pass through its gateway. This would be highly beneficial to the company, because it doesn’t earn much money off of each individual transaction — it will need higher transaction volumes to see significant gains in total revenue.

Recently, we reported that Stripe was in discussions to raise additional funding, at a $US5 billion valuation.

MASTERCARD INTRODUCING TOKENIZATION SERVICE TO NEW AUDIENCES: MasterCard is going to make its digital enablement service (MDES) available to merchants that run apps or websites, those with subscription programs, and private-label card issuers. MDES is a digital payments service that assigns tokens in place of MasterCard account numbers, which allows MasterCard credit cards to be stored securely in consumers’ mobile wallets and merchants’ servers. MDES is designed to sync with acquirer and payment service providers’ tokenization solutions as well.

The main reason MDES is expanding for online merchants is to increase payments security. MasterCard tokens can be stored within the Secure Element of a phone’s hardware or in the cloud, allowing other wallets to leverage host card emulation (HCE) to support mobile payments.

MDES’ expansion to include private-label cards will enable retailers to issue their cards in participating mobile wallets using MasterCard’s tokenization service. JCPenney is an early partner, and it will use MDES to issue its cards in Apple Pay wallets later in the year.

Last week, Apple Pay announced it would integrate a rewards program into its wallet, enabling consumers to load their applicable retail rewards cards.

Visa recently launched its own digital enablement platform (VDEP), which will open access to tokenization solutions for any card issuer. It is also not charging these issuers per-token fees, which could create a huge incentive for the issuers to adopt the platform. It’s unclear as of now if MDES will charge private-label issuers per-token fees.

CLEARXCHANGE EXPANDING REAL-TIME PAYMENTS TO INTER-BANK TRANSFERS: ClearXchange, an online peer-to-peer payments network managed by a consortium of US banks, is going to implement its existing real-time payment protocol for inter-bank transfers. The network’s customers can already send real-time transfers to people within their banks; however, they will soon be able to send money instantly to people across all member banks. ClearXchange is owned by Bank of America, JPMorgan, Wells Fargo, Capital One and US Bank, giving it an addressable customer base of 100 million, according to Finextra.

Real-time payments are increasingly becoming a priority for consumers as banking migrates online, according to Mike Kennedy, CEO of clearXchange. This is likely because customers associate online banking with convenience.

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