Thursday, April 14, 2016

The Problem of the Walled Garden: How Apps are Shifting the Payments Space

The Apple and Android App Stores have exploded over recent years with every major retailer releasing their own mobile application.  The time and development costs of building out a mobile website are increasingly being funneled into the creation of apps.  With the ability to create dynamic mobile responsive websites, why are retailers jumping over to the app-side?  While many great arguments can be made about providing a better user experience and greater functionality, one of the biggest reasons for retailers to create an app is control over your purchasing behavior data.

Up until recently, credit card companies were the dominant owners of consumers' data.  Every major card network has a business intelligence unit that sifts through the billions of purchases made every day and sells analytics back to advertisers, merchants, and other third party data consolidators.  These can lead to amazing insights - Imagine being a local shoe store and learning that a large percent of your customers tend to stop in the coffee store across the street before coming to your establishment; wouldn't it be great to directly target people who just bought a coffee there with a mobile coupon to drive even more traffic?

However, retailers have become jaded.  Why should Mastercard make money off data driven by retailers' own customers?  Wouldn't it be so much better if retailers (or other companies with an interest in what consumers are buying) owned all this purchase data themselves?  Enter the payments-enabled app.

Starbucks was the first major retailer to successfully launch an app with native payment abilities.  While it is great that using the app to pay helps you earn rewards and makes paying (and the line) go faster, the real value to Starbucks is total control over all that purchase data.  By removing the middle-man, Starbucks is now the only party who knows when and what you buy at Starbucks.  

LevelUp is another app that focuses on smaller retailers who may not have the resources to develop their own payment-enabled apps.  Largely positioned as a way for these small merchants to reduce the fees paid to credit card processors, LevelUp works by "batching" multiple purchases together and only processing them once a month (rather than real time).  The impact is that card companies no longer see the individual purchases a LevelUp user makes  at these shops and LevelUp alone owns and controls the data.

For companies like American Express who argue that a significant amount of their value to merchants is based on the tremendous data and analytics they have on cardmembers, this is a scary proposition.  As apps with native payment capabilities continue to proliferate, credit card companies and banks will increasingly lose sight over the broader purchase behaviors of their customers.  However, I believe there will ultimately be a peak and eventually a reversal.  While payments-enabled apps are on the upswing for now, the overall fragmentation will become too annoying and cumbersome to consumers - who wants to need a separate app to pay at every store you may want to visit?  This inefficiency will eventually drive a reversion to broader-based payment providers, as we have already seen with the rise of apps like Google Wallet, Apple Pay, and Square.

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