Why mobile payments still haven’t revolutionized retail

Mobile payments are a revolution waiting to happen. It just makes sense that, with so many of us carrying around increasingly advanced smartphones, we’ll be able to use them to pay at brick-and-mortar stores and the check-out line.

We’ve been hearing predictions like this for years. Recently, Juniper Research estimated that worldwide mobile payment volume would reach an incredible $240 billion this year. By 2015, Juniper predicts, worldwide mobile and point-of-service (POS) terminal payments will reach an even more incredible $670 billion.

And yet, we’re really not seeing physical retailers move to adopt POS technology.

Yes, a few physical retailers are trying out new POS technology — Office Depot, for example, just announced it has teamed up with PayPal to experiment with letting customers pay using their phone number. But this kind of toe-dipping leaves us quite far away from widespread adoption.

Is that because the technology just isn’t available yet? No, the basic technology is no longer a barrier. NFC technology has developed significantly and Internet security is advanced enough to enable secure payments. Even paying via mobile phones using your carrier contract for collection was possible a long time ago and has been used around the world (it’s very common in Japan and has been for years), so that’s not what’s holding back mobile payments.

The slow adoption isn’t due to a lack of investment or innovation among technology vendors, either. Many companies, big and small, have been pouring a lot of money into this market, intent on becoming market leaders and making their platform the end-all-be-all standard. But no one has truly acknowledged the complexity of today’s retail point of sale process and what is required to enable reliable, and scalable mobile payments (and mobile services, for that matter, such as social applications, coupons, loyalty programs) at the retail point of sale.

Costs to integrate new and legacy technologies

One key reason retailers aren’t rushing to deploy mobile payment systems is that they see the cost of the solution as too high for the benefit. Even solutions that do not require new hardware pose significant costs to the merchant through fees and overhead. In fact, the purchase of a new terminal, an NFC reader, or other piece of hardware will likely be the least of a retailer’s expenses.

Because today’s retail systems are so inflexible, the integration of any third-party systems will result in a huge IT expense for implementation. The customization required so that all components of the point of sale system (including inventory management and payment processing) interact with a new mobile payment platform without disrupting the operation of the existing systems is cumbersome and expensive due to complex software integration.

The retailer’s cost to add even one type of mobile payment technology (such as Google Wallet) is currently very high, and since the market is so fragmented, adopting just one of the mobile payment platforms will only address a tiny portion of the market. To pay with Google Wallet, for example, customers have to have a specific phone model and one of the two credit cards that are currently supported.

Retailers can’t absorb these costs. For us to see a real mobile payments revolution in retail that provides added value to the consumer, retailers will need to integrate additional services such as coupons and loyalty rewards, each requiring its own associated customization costs.

But physical retail is at a critical point these days. It’s lost a lot of ground in the war with online retail. To stay in the game, physical retailers will have to start offering added values to clients that they do not offer today. They’ll need to have real-time control over their inventory, and they’ll need high quality information about their clients at their fingertips.

In today’s technology infused world there are more and more disparate systems and technologies that a business needs to remain scalable. From accounting and other internal systems to external web-based providers of leads and information such as Groupon, Squarespace and others.

So what exactly are the costs of this kind of integration?

The investments typically required include:

1. Restructuring the inventory data: mapping products and characteristics, eliminating overlap, regrouping and sorting of items
2. Restructuring client data: creating a uniform data format for the clients of all branches and departments
3. Physical implementation: although smaller in order of magnitude than an implementation of a traditional inventory and POS system (there is no need for dedicated hardware and servers), you still need to make sure that all the devices that will be running the web solution are available and that the peripherals are compatible
4. Training employees and management to use a new system and a new approach to dealing with the data.

Redefining the retail industry’s “operating system”

Having real time access to all of your inventory, and having real time access to data about your customers’ purchasing history and habits, including customers that are in the store at the moment, will help physical retail remain in the game. For example, Amazon has been applying sophisticated algorithms in order to offer additional products to customers during their browsing experience to increase sales. A new “operating system” for retail that provides companies with access to real-time data of inventory and customers is a must in order to offer such service to users in the future.

Because of a lack of industry standards, retailers can’t afford to gamble and choose one standard of mobile payment over another – they need to be prepared to offer their customers the ability to pay through whatever means the customers want.

Take the online commerce space as a perfect example. Platforms like Magento, Demandware, Shopify and Venda, allow easy integration with third-party software, so that payment solutions like PayPal, BillMeLater, and Google Checkout are thriving and being adopted by online retailers and consumers alike.

The very good news is that we’re seeing a new generation of retail “operating systems.” For retailers who are using web POS software, accepting a new form of mobile payment can now be as easy as installing an app. There is no need to change payment processing vendors, rebuild integrations with inventory management systems, or incur any other hassles. In the last year we’ve seen that large retailers are beginning to understand the need for a cloud-local based comprehensive POS solution.

Still, it’s ultimately a game of wait-and-see for those of us working in this market. The future of the mobile payments industry is in the hands of retail companies. If they embrace the potential economic advantage and convenience of the new, more cost-effective technologies, they have a lot to gain. Retailers need to make the choice to start the retail revolution.

Kris Hiiemaa is CEO of retail point of sale software and inventory system provider ERPLY.

[Top image credit: Walmart Stores/Flickr]