Mobile payments once again on the cusp of taking off

Consumers have been forever "this close" to making every purchase with just a tap of their smartphones. For years we’ve been told cash and credit cards will be obsolete as technology makes mobile payments more convenient and worthwhile than pulling out your wallet.

That hasn’t quite happened yet.

There is, apparently, strong consumer interest in mobile payments. But despite an array of players – including Google Wallet (GOOG), PayPal, Isis, LevelUp, Square and Loop – widespread adoption has not occurred. According to a study published last week by Yankee Group, just 16% of mobile device owners have used their phone to make an in-store payment in the past three months, while two-thirds of consumers are interested in doing so.

Mobile payment transactions more than tripled from 2011 to 2012 in the U.S., reaching $539 million that year, according to eMarketer, which expects these transactions to increase and reach an estimated $58 billion by 2017. But in a report eMarketer said the market is growing slower than expected, noting how it scaled back estimates of user adoption and transaction value from its initial projections in 2012.

Part of what’s holding consumers back, analysts say, is that using credit cards isn’t that much of a hassle. “It’s not solving a clear customer problem. Taking out your card and paying is not a problem or inconvenience in the U.S.,” says Kebbie Sebastian, president of Penser Consulting, a firm focused on the payments industry.

Where’s the value?

A bigger factor keeping consumers from embracing mobile wallets is the lack of incentive. “There’s not a lot of value around it,” says Jordan McKee, an analyst at Yankee Group. Consumers need a financial reason to make the change. “Loyalty, offers, coupons – things that add immediate value that your credit card can’t do – should take a front seat. It should be about the overall value proposition, not just the payment,” McKee says.

Mobile payment systems could take a page from the playbook of the very successful Starbucks (SBUX) app. The app, which generated $1 billion in transactions in 2013, not only lets customers pay for their daily coffee quickly and easily but also lets them refill their loyalty accounts with a few taps, offers instant discounts on menu items and links directly to Starbucks’ reward program. “It’s a great example of what a mobile wallet should be – it’s not only about payment, but the loyalty and offers,” McKee says.

So in an ideal scenario, for instance, your mobile wallet app would track your movement and know you’re turning the corner at Baby Gap and you’ve shopped there before, then send a coupon to your phone to entice you to go in, Sebastian says.

Name recognition

Of all the mobile payment options and players jockeying for position, who’s set to come out ahead?

Leading the pack is PayPal, whose clear advantage lies in the company’s 143 million active user base. In the Yankee Group’s survey, 15% of mobile phone owners said they used PayPal’s app in a store in the past month, by far the most of any wallet app.

“What’s nice about PayPal is it’s one of the few that allows for payment functionality to occur in a variety of areas – online, at the physical point of sale, and on mobile,” says McKee. Isis, a joint mobile wallet app venture between Verizon Wireless (VZ), AT&T (T) and T-Mobile (TMUS), for instance, can only be used in-store. The app enables you to use your online account on your phone, so you can pay directly from the app, check your balance, and send money to others. The app has a feature that lets users find shops or restaurants nearby that accept PayPal payments; as of January there were 1.9 million bricks-and-mortar stores that accept PayPal. You can also “check in” so the merchant knows you’re in the store, and can select how you want to pay at any time (you can connect various card and bank accounts to the app). And at the Mobile World Congress last week PayPal also announced a partnership with Samsung on the Galaxy S5 to let users pay for items (password-free) at all online and physical stores that accept PayPal, using only their fingerprint as verification.

More than two years after its launch, Google Wallet has gone through a few revisions but has yet to gain traction. Just 4% of consumers surveyed by Yankee Group used the app in a store in the past month. The app allows users to store credit, gift, and loyalty cards, transfer money to others, and theoretically ditch most plastic in their wallet by paying for purchases online and in stores with their phones.

Until recently the app only worked on phones that had “near field communication,” or NFC, technology — a close-range, wireless communication system that enables users to make payments by tapping their phone against a credit card reader. That meant iPhone owners couldn’t use Wallet for purchases because Apple’s (AAPL) iOS devices don’t support NFC. Payment functionality has also been limited to those on the Sprint network.

But that’s set to change. The latest version of Android eliminates some of these problems with its support for technology called Host Card Emulation (HCE). This allows payment card information to be stored in the cloud rather than in a phone’s hardware, which means Google Wallet’s payment feature won’t be restricted to Sprint’s network. And MasterCard (MA) and Visa (V) recently announced they’re introducing technology that taps HCE and will give merchants and banks options for integrating contact-less payment systems into their own mobile apps, thus encouraging greater use of mobile payments among shoppers.

Loop has gotten attention lately touting technology that lets you pay with your phone at nearly any merchant, essentially by allowing smartphones to function like magstripe credit cards when making a purchase. Users have to buy a fob, which stores your credit card information and plugs into the phone, or a card case to “trick” point-of-sale terminals into thinking a credit card has been swiped. (The fob costs $39; the case will be available for $99 in April.)

Loop is a “cool technology” but ultimately too niche, McKee says, and a bit of an awkward experience. (In a review Yahoo Tech’s David Pogue called the Loop fob “a little goofy.”) Consumers don’t like paying to make a payment, and without the integration of relevant loyalty offers, which Loop lacks now, “why would I use this rather than my credit card?” McKee says.

The best is yet to come

The app with the most potential is one that hasn’t launched yet, McKee says. Merchant Customer Exchange, or MCX, is composed of a group of retailers, including Walmart (WMT), Target (TGT), CVS (CVS), ExxonMobil (XOM), Wendy’s (WEN) and Sears (SHLD), teaming up to develop an application that will let consumers pay for goods at participating stores with their phones. The app, for which there is no debut date yet, will also offer loyalty-based coupons and deals. McKee says the app would be linked to a user’s bank account, thereby bypassing credit card issuers.

MCX’s key advantage is the fact that it signed on with grocery chains and gas stations – two high-use areas. “That’s a great way to encourage use and change an entrenched behavior,” says McKee. “It’s going to be very disruptive.”

Amazon (AMZN) and Apple are the other sleeping-giant contenders. McKee predicts Amazon will attempt to expand its work with Amazon Payments and potentially package it into a mobile wallet. It has hundreds of millions of cards on file and Yankee Group data shows 1 in 3 consumers choose Amazon as the vendor they'd most likely use a mobile wallet from.

In January the Wall Street Journal reported Apple also has ambitions to enter the business. Given the enormous database of credit card accounts it already holds for iTunes and app store users, it’s an obvious opportunity. Apple's biggest advantage, says McKee, “is its unprecedented ability to change consumer behavior, which it has demonstrated time and time again."