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Rewards: the litmus test for the future of mobile payments

by Tim Spenny , 13.10.2014

If you are wondering what mobile payments look like in the future, look no further than your current travel rewards programs.

Personally, I’m a loyal airline flier and credit card user - and due to my loyalty, my behavior is easily influenced when I book travel and make large purchases. The benefits of being loyal means earning miles, qualifying for upgrades, boarding my flights early, and, of course, using my miles for free flights. In short, I like earning airline miles and that benefit has changed my purchasing behavior over time. There are many travel rewards program to choose from across hotels, airlines and other providers but mine offers the best benefits given my needs.

There is no reason to believe that the future of mobile payments will be any different.

The announcement of Apple Pay and the subsequent selling of 10 million of the latest iPhones have moved mobile payments mainstream to build awareness with consumers that, yes, can pay with their phone securely, and yes, it is cool.

In addition, with Apple declaring NFC the mobile payment platform of choice, surpassing bluetooth and other potential technologies, there is now a clear technological winner that will bring stability and confidence to the payments ecosystem. With that stability, brands, retailers, and any other payments player will feel more confident jumping into the mobile payments space. If they are smart, they will design their mobile wallets with a rewards package that speaks to their target audience because it’s not simply a slice of the interchange income that is up for grabs.

Why do Airlines and hotels spend millions of dollars on their rewards programs?

To create more loyalty and attract more customers - and who doesn’t want that? To understand the future of mobile payments, one must look to the past. In the early days of online bill pay, banks and credit unions would charge their customers for the privilege to pay their bills online due to the expense of offering online bill pay. This caused slow adoption and lackluster usage. What banks soon realized was; those customers that used online bill pay were much more loyal and had opened more accounts which made the overall relationship more profitable. In addition, these online bill pay customers were less likely to leave their bank due to the stickiness of using online bill pay. Soon thereafter, banks started paying people to sign up and use online bill pay, $50, $100 even $200 for an active checking account with bill pay. Now, online bill pay is a table stake that customers expect and it has become and continues to be a key measure of a loyal customer’s relationship for financial institutions.

This is how mobile wallets will evolve. The upfront costs of creating a successful mobile wallet with a strong value proposition will be expensive. But over time, the value of those relationships with consumers that use their brand or retailer’s mobile wallet frequently will be much more loyal, they will spend more, and they will have a sticker relationship. Retailers, bank, and even brands will take notice and start offering stronger incentives to use their mobile wallet versus other mobile wallet offerings.

If you look at the multitude of failed mobile wallets, they all point to one issue; they do not offer a compelling value proposition, which will make mobile wallets successful in the future. I would hate to have to state the obvious mobile payment success stories once again, but Starbucks and Uber have already proved to us that if you want adoption and usage, offer a strong value proposition.

Where there is loyalty and benefit, there is adoption and usage. In other words, consumers will use the mobile payment, i.e. mobile wallet, that they feel provides them the best benefit. This will create a flood of mobile wallet offerings from retailers, individual brands, hotel, airlines and coupon vendors.

In the future, there will be no primary mobile wallet that dominates the industry, but many mobile wallet options that speak to the diverse and wide range of customer needs and values mobile payments all using NFC as the dominant platform. The mobile wallet industry will be as fragmented as the current travel rewards industry with winners only being defined as a percentage of their current customers. The launch of Apple Pay has given a foundation for which the industry can grow and evolve and we will see the evolution happen very quickly to mirror the business model and offering that is most successful.

Tim Spenny is Vice President on GfK’s Financial Services team in North America. He can be reached at tim.spenny@gfk.com.