Finding Mobile’s X Factor

How the latest loyalty, data, and engagement programs are promoting mobile payments

By Ed McKinley

Consumers have been slow to retire their plastic credit and debit cards in favor of paying with their smartphones. “The reality is there’s nothing broken about the card,” notes Ben Jackson, an analyst at the Mercator Advisory Group. “The mobile payment doesn’t solve a payments problem for the consumer.”

In fact, just one in five Americans who own a smartphone tapped or waved it to make a mobile proximity payment in the last six months, according to Nicole Perrin, an analyst at eMarketer. The firm estimates that not even a quarter of smartphone owners will use them to pay this year, and, by 2020, only a third will do it. “It’s still a fairly niche activity among smartphone owners,” she concludes.

If anything can make mobile wallets, mobile apps, and mobile payments inevitable, it’s loyalty rewards, offers, and discounts, observers agree. Those incentives could overcome the “friction” of having to open the phone, open an app, and deviate from the familiar practice of swiping a card or the relatively new necessity of dipping a card, multiple sources say. With the right rewards and discounts, presented in the right way, mobile wallets could take their rightful place among the continuum payments without ever having to entirely replace cards, cash, or checks, they predict.

Moreover, every good loyalty scheme will eventually incorporate mobile capabilities, according to Ben Kaplan, president and CEO of Cashstar, a prepaid and loyalty platform. “Consumers are inherently mobile, and mobile phones are both powerful and ubiquitous, so any loyalty program that wants to engage with their consumers needs to take into account those simple facts of today’s market,” he asserts.

Retailers also can use mobile wallets and loyalty programs to collect information that helps them understand their customers’ habits and desires, notes Perrin. “They’re going to want to use it for data, and having it tied directly into a loyalty program is ideal for them,” she says.

Discussions about loyalty programs in the digital era tend to begin with references to Starbucks. “Starbucks is the gold standard because they were the first to pull it all together and figure it all out,” Jackson says of the company’s system. The coffee chain made its cards reloadable and attached them to the loyalty program, an approach other companies have sought to emulate, he notes, citing similar programs at Dunkin’ Donuts, Tim Hortons, and Burger King.

But Starbucks didn’t just do it first. The company also did it exceedingly well, according to Kaplan: “They have done an amazing job of building out a really rich, full-featured application.”  The coffee provider built most facets of its own platform, but Kaplan acknowledges that his company contributes to the system by helping with digital gift cards.

Loyalty programs on retailer-operated mobile apps—like the one at Starbucks—use rewards and features like the pay-ahead function to draw customers back into the stores and back to the mobile experience, Kaplan says. Other types of mobile apps—including general-purpose ones like Google Wallet, Android Pay, Samsung Pay, Apple Pay, and PayPal—employ loyalty to encourage users to rely on the app wherever and whenever they can, he notes.

Discounts attached to company loyalty cards have proliferated at gas pumps operated by convenience store chains, says Jackson. Cumberland Farms, a brand well known in New England, offers a 10-cent-per-gallon price break to motorists who use its card. Family Express operates a similar program in the Midwest. The discounts on gasoline bring drivers into the station, and, once they’re there, they often stop in at the store for bread, cigarettes, coffee, candy, or snacks, he says, adding that “getting them in the door is important.”

What the coffee purveyors and convenience stores have in common is that customers stop in frequently for small-ticket purchases, Jackson says, noting that it’s a scenario that builds rewards. It just doesn’t work that way for companies offering merchandise at higher prices, he explains: “You’re not buying clothes or shoes every day.”

If they’re frequent enough, small purchases add up to big numbers, says Perrin. Consumers who purchase small-ticket items with mobile payments do so repeatedly, and their total annual purchases are increasing. In 2015, the average mobile payments user spent less than $400 with the help of mobile, but that rose to more than $700 last year and is expected to reach $1,200 this year, eMarketer research indicates. “By 2020, even though we’re still having low penetration, each of those users will be spending at least $4,000 [via mobile payments] that year,” she adds.

Loyalty by Design

Retailers often tie loyalty rewards to purchases, but a few retailers choose to use loyalty programs in a quest for engagement, Jackson says. Sephora, the French-based international chain of cosmetics stores, serves as a case in point. The company’s app includes gift cards but not much else in the way of payment mechanisms. Instead, Sephora seeks to involve customers in its product lines. Besides loyalty rewards, the Sephora site touts new products, trending products, editors’ picks, special values, recommendations for individual shoppers, expert advice, live 3D virtual demonstrations, and tutorials. All of the offerings invite customers to enjoy luxury and pursue beauty.

So knowing one’s customers becomes paramount in creating and sustaining successful loyalty programs. In another example, Kohl’s, the moderately priced department store chain, sends its value-driven customers daily email messages offering an array of discounts and rewards—with only a quick nod to fashion. Levi’s, on the other hand, peppers regular customers with daily email messages emphasizing “cool” and only occasionally offering price breaks or loyalty rewards. Peruse a particular pair of jeans on the Levi’s site, and the company follows up by sending an email message an hour later that says something like, “We’re still holding those 511s you were looking at.”

United Airlines knows many of the travelers who use its MileagePlus X mobile app become “junkies” who delight at earning frequent flyer miles and using them to purchase luxury goods, says Kaplan. Users earn bonus miles by shopping at certain stores, and they can “burn” those miles by redeeming them for gift cards they can use immediately in those stores, he says. Many find their miles such a compelling currency that they work for years to amass and spend them, he maintains. (Kaplan’s company works with United on the program.)

Once retailers know their customers, Jackson suggests they can choose appropriate rewards and discounts, but he warns they shouldn’t choose rewards arbitrarily. Starbucks and other savvy retailers connect their rewards to their core business, he notes. They don’t offer cash back or some random piece of merchandise. Instead, the companies give customers more of what they came in to buy in the first place. “It’s a very closed-loop rewards system to bring people back,” he explains.

Kaplan agrees. Just a few years ago, retailers were declaring that they wanted loyalty programs just like the one at Starbucks, but following the lead of another retailer too closely doesn’t make sense, he says. Instead, loyalty programs should support a particular brand with rewards that relate to the company’s products and make sense relative to the prices the company charges, he notes. “You don’t need to order ahead on a mobile phone at a department store,” he says. Retailers also should determine whether they need to include payments and turn their apps into wallets, he adds.

Lots of retailers have yet to pick a sophisticated approach to mobile and loyalty that follows the example of the fashionable Sephora, the value-minded Kohl’s, or the purportedly hip Levi’s. “The struggle for a lot of these guys is that they want their webstore on the mobile app—it’s a narrow way to think about it,” Jackson says. It’s a one-dimensional approach where customers can go into the store, shop online, and shop on the app, but the stores aren’t taking advantage of the ability to deliver content, he observes: “There are opportunities that haven’t been fully explored yet by these companies to make the mobile app work for them a little better.”

Data for Discounts

But help is on the way. Artificial intelligence and machine learning may soon help retailers enhance engagement by making offers relevant to recipients by backing them with useful information, Jackson predicts. Accomplishing that requires data on the shopper as well as on the product. These days, when someone looks at a pair of motorcycle gloves online, companies simply bombard the shopper with ads and offers on any motorcycle gloves. Knowing the customer through data could tailor offers on gloves to weather, geography, and the customer’s style of motorcycling. Jackson explains, “It’s just brute force right now,” through a large volume of contacts, noting that “there are a lot of ad blockers online, and that says something.”

Location-based marketing can aid loyalty schemes, too, according to Kaplan: “Geo-location for offers as well as for acceptance with mobile payments and loyalty programs is very powerful.” He reports using the store-location capability in the Starbucks app frequently. The United Airlines app, he notes, lets users know the location of brands and stores participating in the frequent flier program.

Still, plenty can go wrong with location-oriented marketing, especially with beacons set up in stores. Using them for location-based discounts and rewards has piqued the interest of retailers for several years now. At first, it might seem perfect to offer a price cut on merchandise when the system can sense that the customer is standing right in front of it. But stores have seldom put the technology into practice. That’s because retailers worry about what Jackson calls “the creepy factor” that accompanies the technology. “It’s creepy that they know where I am and when I’m there,” he says, explaining the shopper mentality. Retailers can avoid that trap by making an offer at five nearby locations, he suggests. Mainly they should remember that “just because you can do something, doesn’t mean you should,” he says.

Security remains a concern for some consumers when it comes to mobile payments, notes Perrin. “It isn’t something people have specific concerns about,” she says. “People are a little bit nervous in a generalized way. It’s a technology they don’t completely understand.” Still, security isn’t as big an obstacle as failing to see a need to give up cash and cards without the benefits of loyalty rewards, she notes.

Then there’s the question of who wants to use mobile wallets and mobile payments. “It’s basically your early adopter,” Perrin says. “They tend to be younger—under 35 would be more likely. Also, men are more likely than women.”

But age doesn’t necessarily predict a proclivity to pay with a mobile wallet, Jackson observes. As an example, he describes a couple in their 40s, born a little too early to qualify as Millennials. The wife has become an avid mobile wallet user, while the husband didn’t bother to transfer the relevant apps when he upgraded his phone.

The ultimate question in mobile payments may be who will win the mobile wallet wars. For Kaplan the answer is “Yes.” By that he means it’s better to view mobile apps, mobile wallets, mobile commerce, and retailer-specific apps as separate entities. Multiple general-purpose wallets will succeed, as will many store-branded apps that include, but aren’t limited to, payments, he predicts. For both types, he notes, adoption will be driven by offers, discounts, promotions, geo-location, and improved customer experience.

Kaplan’s company works with big corporations but also does business with small- and medium-sized players. From the latter experience, he says a medium-sized regional retailer should have a digital loyalty and marketing strategy. Will that mid-size player also create a mobile app that accepts payments—like Starbucks or Target? Probably not, he says. But that mid-market chain should have an app, should have a digital strategy, and should support mobile payments, he says, adding that its coupons can appear in an Apple Wallet. “It doesn’t take significant investment,” he maintains, “to ensure that you’re providing a really good mobile experience for your customers.”TT

Ed McKinley is a contributing writer for Transaction Trends. Reach him at [email protected].