The world will have 1.75 billion smartphone users by the end of the year. Yet despite this massive level of smartphone penetration, many of the world's largest markets have failed to drive widespread adoption of in-store mobile payments enabled by smartphones. Slow adoption in markets like the U.S. comes despite the fact that there are several markets around the world that have seen more rapid growth of different forms of mobile payments, such as Kenya, Hong Kong, Australia, and Korea. Slow adoption also comes in spite of the promise heard every year for the last five or so years (especially in the U.S.) that mobile payments are inevitable and that "this is the year." Well, small businesses are tired of the promises and want to know: "Do I really need to be ready for mobile payments? And if so, when?"

In order to answer this question, we must first understand why adoption has been so slow in markets such as the United States.

Why has adoption been slow?

As McKinsey payments guru Kausik Rajgopal likes to say, "Payments is a high-inertia, high-network-effect business." This means that in order to change both consumer and merchant payments behavior, providers of payments products and services have to offer a step-change improvement over existing offerings-- something far better, far easier, and widely available.

Markets that have seen earlier adoption of mobile payments can be explained through this lens as well. In Kenya, for example, the mPesa mobile payments platform was built as part of a mobile phone growth spurt. Providing value-storage and payments capabilities through the fast-growing network of mobile phones was a much cheaper and faster way to bank for many Kenyans compared to physically building bank branches or building out credit card networks. This ability to provide banking and card-like services to the massive portion of the population that was previously largely left out of the banking system was far better, far easier, and available at scale compared to the significantly more cumbersome and less secure cash-based (or even barter) system that previously dominated the Kenyan consumer economy.

A step-change improvement is much harder to achieve in markets like the U.S. where there are well-functioning and ubiquitous incumbent payments systems. While of course speculative, a five-to-ten year gradual change-cycle is more likely than one or two years of big change.

How do we know now is the time to get involved with mobile payments?

There are strong indications we are now in the middle of that change-cycle. Just last year the company I work for, PayPal, processed $27 billion in transactions in which either the buyer or seller used a mobile device to pay or accept payment, double the rate from the previous year. While not large enough in absolute scale to claim true mass adoption, the pace and scale of growth gives a very strong signal that our market is nearing a tipping-point.

The level of experimentation by various-sized businesses is another indicator that the time for mass-adoption is nearing. Early-adopting small businesses have begun experimenting with a variety of mobile tools as they look to drive new sales, develop stronger consumer relationships, and simplify their operations. Broadly available tools like mobile offers and mobile-based card terminals sit alongside industry-specific solutions that have also been piloted, with examples like "order ahead" or "pay at table" at restaurants. Pilots like these allow us to test-and-learn jointly with our merchants and consumers, essentially co-developing products and services. Only with years of experimentation and refinement can providers confidently tell merchants and consumers to invest at scale in making the change to mobile payments. We are several years into this experimentation, and can confidently say that this shift is fast approaching.

In addition to indicating a likely fast-approaching wave of merchant adoption, we also have learned another lesson through our customers' experiments. Consumers increasingly expect that they can move seamlessly between all elements of their purchasing journey--no matter where they are physically. In order for businesses to meet these rapidly evolving customer expectations, they need to deliver a more connected journey that includes easy product discovery and seamless and secure checkout experiences across devices anytime, anywhere, with fast delivery.

So how can you leverage mobile payments to grow your business by turning prospects into customers and developing stronger customer relationships? I'll share some tips in my next column. Stay tuned!

Published on: Sep 29, 2014
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