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Will the shift from credit cards to mobile payments be good, bad, or neutral?

Will the shift from credit cards to mobile payments be good, bad, or neutral for the restaurant industry?

October 27, 2014

By Seth Priebatsch, LevelUp's Chief Ninja

By this point, everyone in the restaurant industry has heard about Apple's new mobile wallet initiative, Apple Pay. To date, a lot of the chatter has focused around the question of will it, or won't it, catch on. Is this the beginning of the mobile payment revolution or just another false start like Google Wallet a few years back? 

Personally, I don’t think that's the most useful question we could be asking. The safe bet is to assume that Apple's move will ignite the mobile payments space, just as they've ignited so many others. So, the really interesting question becomes: will this shift to mobile payments be good, bad, or neutral for the restaurant industry? 

Predicting the future is hard. But predicting the past is easy, so let's start there. We can intuit a lot about how this next shift in payments will impact the restaurant industry by examining how the last one did. Let's look back to the transition from paper (cash) to plastic (cards) over the past 15 years. 

Fifteen years ago, 90 percent of payments at restaurants were made in cash. Next year, it's predicted that nearly 90 percent of all payments will be done using credit/debit cards. (See graph below.) That's almost a complete transition in customer payment behavior in under 15 years!

So was the paper-to-plastic shift good, bad or neutral for the restaurant industry? There are lots of arguments to be made on both sides. It was good because it sped up lines and minimized cash management issues. It was bad because it increased costs significantly and didn't really enrich merchant's understanding of their customers. Data was collected but kept by the plastic card brands for their own utilization, or sometimes sold to the largest national retailers under special arrangements. 

Whatever side of the argument you fall on, one thing is for sure: this shift was pushed to the restaurant industry, rather than the restaurant industry pushing the shift. The restaurant industry was never able to truly engage with the players making the shift happen and so, collectively, restaurant owners had very little influence over the outcome. No wonder the end-result of a 90 percent credit-card world is at best a mixed bag. 

So, how can this quick tour down memory lane help us predict the impacts of the upcoming shift to mobile? Well, let's look at the similarities. 

First, the shift to plastic succeeded because a small number of massive companies with lots of centralized benefits on the line (namely, more profits) pushed hard for it. Visa, Mastercard and Amex (the troika collectively pushing the shift to credit cards) are just under half the market cap of Apple… combined! So if Apple decides we're paying with our phones, we're paying with our phones. 

A second thing we know for sure is that payment processing rates will go up, just as they did with the paper-to-plastic shift. As Amex, Mastercard and Visa have amassed near-complete control of payments, they've leveraged that power to push rates up. Now Apple is taking a 25bps fee on every transaction coming from their wallet. 

Rates aren't going up right now, but over time they'll have to. The card issuers need to keep their margins thick and, as before, it's restaurants that will end up eating that cost. Even though this probably won't make business owners happy, there will probably be little pushback, simply because the pain of an extra 25bps per transaction is diluted across hundreds of thousands of restaurants. Whereas the benefits to the card issuers are huge and centralized, they have a lot more willpower (and actual power) to make the rates rise. 

A third thing we can surmise is that the transition to mobile will happen much more quickly than the shift to plastic. The graph below shows the rate of smartphone adoption over the last 5 years. With nearly 90 percent of customers wielding a smartphone, the shift to mobile payments will be a 3-to-5 year transition, not at 15-year one.

Given those three data points, we can probably assume that this shift, like the shift from cash to plastic, will be a mixed bag for the restaurant industry. Some upsides (faster lines), some downsides (higher costs), but mainly the same situation as exists currently (no data about spending patterns, no more of a direct relationship with the customer and still no control over the experience). 

Up until this point, this post has hopefully been a (modestly) interesting read, but not necessarily a super uplifting one. So far it's been a story of big shifts happening to the restaurant industry, without any real involvement from restaurateurs. Well, here's where this post gets exciting, because the shift to mobile has the potential to be materially different. 

Unlike the shift from cash to plastic, restaurateurs have the opportunity to leverage the shift to mobile to accomplish things they care about. There was really no way for restaurants to compete for customer mindshare in the leather wallet. Sure, plastic loyalty cards can be placed into leather wallets, but that always involved asking the consumer to remember to carry (and use) a single-purpose device in addition to actually paying for their food. 

Luckily, the mobile wallet is going to be different. Apple has already made Passbook, their digital wallet, open enough for restaurants to push their own payment/loyalty device into it. And with customers being retrained to pay with their phones, they'll be similarly retrained to look not to their leather wallet, but to their digital wallet for what "card" to use. Because Apple's open infrastructure enables merchants to be right there, they can, for the first-time, compete on equal footing with the big card brands. 

But why would merchants want to do this? American Express, Visa and Mastercard work just fine as plastic cards and they'll doubtless work just fine as mobile payment mechanisms. Well, the reason why forward-thinking brands will want to compete in that mobile wallet is the same reason that Starbucks launched their mobile payment application 5 years ago. The payment is the focal point of the customer interaction and whoever controls that interaction, controls the customer. The best brands want to own their own customers. 

When you own the payment you can do a whole bunch of awesome things: gather analytics and data about the behavioral/transaction patterns of your customers, save on processing costs, influence customer spend with embedded loyalty campaigns, control the receipts that show up on the phone and use that real estate to educate/engage your customers about new product launches. Just think about the power of presenting customers with your brand on their phone each time they pay. That's the perfect opportunity to introduce them to other mobile features you might offer, such as gift-cards, in-app ordering, mobile menus, and nutritional info and more. 

That litany of benefits is exactly why American Express, Mastercard and Visa are so keen on pushing the mobile wallet, and being the default method of payment within it. They want to own the customer at that moment of payment and get all the data, marketing and other benefits that comes with it. But with Apple opening up the wallet to individual brands, restaurants finally have a shot to take back control of that experience, reaping the benefits of the shift to mobile themselves rather than just ceding that value to the big card brands. 

Of course, none of this will be easy. Made harder by the fact that there's no huge downside to simply maintaining status quo. Letting the big three card brands own the mobile wallet, just like they own the leather wallet, will be a continuation of how things are now, with perhaps slightly higher interchange rates down the line. That's missing the point though. It's not about the risk of maintaining the status quo, it's about the opportunity-loss of not seizing the the best shot in a century to rewrite the balance of power in payments. And not taking advantage of the huge gift that Apple has bestowed upon the restaurant industry. 

That last sentence might surprise you a bit. Based on Apple's announcement, you might think that Apple intends to just cede the mobile wallet to the big-three card brands. But let's not forget that they made the wallet open enough that brands (like Starbucks) can push their payment card into it. And, Apple gave restaurants one massive hidden advantage: iBeacons. 

With iBeacons, restaurateurs can ping customers as they approach the counter to remind them to pick their merchant card, not their Amex, from their digital wallet, even making it appear automatically. Because restaurateurs own the physical real estate and can thus program the beacon notifications, they have the upper hand in determining what cards customers see first. If you think about it, it's logical that the brand that owns the real estate the customer is currently standing in should be best positioned to influence how that customer interacts at the counter. 

So, 1500 words later, I think I'm finally ready to answer the short question of: is the shift to mobile payments good, bad or neutral for the restaurant industry? As with all good questions, the answer is a bit nuanced. By default, the shift to mobile payments will be neutral for restaurants, with some modest downside in the form of marginally higher payment processing rates. But, with effort, the shift to mobile payments can be exceptionally good for merchants, providing the opportunity to take back control of the customer payment experience and enhance customer engagement in new and exciting ways. 

Apple's announcement was the starting gun to kick off next big shift in payments. Restaurateurs everywhere should be thinking about their strategy to actively engage with, and control the outcome of, this next big shift.

Image courtesy of Wikipedia.