The rise of in-app commerce
While payments providers, networks, retailers and tech companies jockey for position in the expanding mobile payments market, mobile Web browser-based payments and in-app payments have become the largest segments. To compete in this exploding area, merchants and payments providers must address the unique requirements of in-app commerce to optimise the user experience.
App commerce is growing rapidly with a compound annual growth rate of more than 50%. First Annapolis recently estimated current in-app payments volume at approximately $64 billion and $135 billion in Europe and North America, respectively. US consumers clearly set the trend for mobile usage, as of July 2016 spending half of their total “digital media” time in mobile apps according to Web measurement firm comScore. European markets trail on the adoption curve by one to two years, while China is also one of the highest in the world.
While increasing smartphone penetration will lead to more mobile payments across use cases, consumers and merchants increasingly are embracing app commerce and in-app payments. In-app payments are cannibalizing other traditional types of payments as app commerce use cases displace physical transacting at the POS, traditional mail order and telephone payments, and e-commerce.
Digital sectors lead the way for app commerce today as much of the e-commerce volumes in these sectors migrate into apps that offer greater functionality than traditional Web-based environments. For example, Zynga, an online gaming company, noted that 76% of its Q1 2016 bookings came from a mobile device. Transportation and travel are also leading sectors for app commerce given the utility created by apps for people on the go (Uber being the classic example).
Growth in in-app payments increasingly will be fueled by emerging in-store use cases as quick service restaurants drive increased efficiency with app-based ordering. Max, a Swedish burger chain, reports that half of all sales now come from digital channels, including self-checkout kiosks and the Max mobile app. Digital channels are attractive because the customer experience is superior and these channels produce higher average order sizes for Max. The app and other digital channels have gone from being a support function to being the chain’s primary channel, according to Max.
Retailers are still learning the ropes of app commerce; today, retail lags other sectors in app commerce penetration. We expect this to change, however, as apps can serve as a powerful platform for self-checkout as well as integrated loyalty. Walmart, for example, is adding complimentary grocery pickup in several US markets, an order-in-advance model ideally suited for the mobile app. We expect that evolution of integrated commerce, loyalty and payments to eventually accelerate growth of app commerce within the retail sector (as observed today at Starbucks).
We also expect regulation to be a catalyst for the growth of in-app payments in Europe. PSD2 intends to increase e-commerce security by requiring strong (two-factor) authentication. As the PSD2 current language is written (still in draft form), merchant card vaults, which drive a substantial portion of mobile commerce today, will not comply with strong authentication requirements for transactions that exceed €10 ($10.70). Creating frictionless use cases for two-factor authentication will be challenging; however, biometrics authentication (“something you are”) on a smartphone (which can also hold an encryption key, or “something you have”) is a compelling option. We expect smartphones to become the platform of choice for payment authentication and for apps to play a key role in enablement of payment use cases.
While the growth of app commerce is robust (we estimate growth at more than 50% and accelerating), there’s still significant room for improving transaction outcomes and the quality of payment services supporting app commerce. For one, fraud management solutions and services typically are not tailored for the unique requirements and advantages of the app environment. The nature of app commerce fraud is unique (e.g., repeated installation and wiping of the app to take advantage of sign-up offers) as are the tools available (e.g., precise geo-location and more complex device fingerprinting algorithms). The customer experience is also often not optimally designed to be frictionless, forcing too many steps or even a 3D secure authentication in order to sign up. The development of mobile wallets and apps such as Apple Pay should help to streamline this experience. App commerce is simply not the same as e-commerce; rather it requires a unique set of payments capabilities to be optimized.
The acceleration of growth in app commerce will help to fuel the ongoing increase in mobile payments. Merchants and payment service providers must invest in mastering this new payments environment if they are to capitalise on this growth.
By Allan Reynolds, consultant, First Annapolis