Upside for Mobile Payments Comes Before the Payment

The best thing about mobile payment apps is not the speed of transactions made with phones, but how the apps let people manage their accounts on their own instead of wasting time at the register, according to early results from retailers.

Bankers have been promoting the mobile payments idea for years, saying that using phones to make purchases can shave seconds compared to transactions using cash or standard payment cards.

However, Starbucks Corp., one of the few stores with a mobile payments program in place, says these transactions are little different from other card purchases, and the real benefit to the merchant comes when people use its app to reload their accounts while waiting in line instead of at the register.

The Seattle company has a thriving prepaid card program, but many customers have been managing their accounts at the point of sale — adding time to the interaction by inquiring about their balances and using another payment card to add funds.

These steps are typically handled as separate transactions, in addition to any coffee the customer might buy.

Now, with the mobile payments app, people can do all of this on their own.

Chuck Davidson, the category manager for innovation on the Starbucks card team, said "a lot of customers who were previously waiting until they got to the cashier to reload have taken that activity out of the line and they're reloading on the phone," significantly reducing their total transaction time.

Particularly when the store is crowded, customers are eager to keep the line moving by handling reloads ahead of time, and Starbucks is thrilled that they want to. To the customer, reloading the card at the cashier "is like [when] you're at the grocery and you whip out your checkbook," Davidson said — no matter how fast you handle it, the process may still annoy everyone else in line.

Though many customers are wowed by the app's ability to handle payments, they keep using it because of its balance-check and reload features, he said.

Starbucks is keenly aware of the ways prepaid cards can slow down the line, and has long been looking for ways to address the issue. It once considered putting a balance-display screen on its cards so people would know when their funds are low. That plan never materialized with plastic, but it finally came to life with the introduction of the Starbucks app for Apple Inc.'s iPhones, Davidson said.

"The card is a piece of plastic, and it can't necessarily tell you how much your balance is," Davidson said. "For an app to be meaningful, it has to give the customer utility."

George Tubin, a senior research director at the research firm TowerGroup Inc., said mobile phones are making prepaid accounts easier to manage. "It completely makes sense that they want to move that out of the physical world and into the virtual world, so that the tap-and-go" contactless payment "truly is a faster type of transaction," he said. Without the app, "that reload process definitely adds a lot more time, because it's a credit card payment on top of tap-and-go — it's a double transaction."

Today the Starbucks app can be used to pay at over a thousand of the company's locations, primarily those located in Target Corp. stores, and allows cashiers to charge a prepaid Starbucks card by scanning a bar code that is displayed on the phone's screen. Though it functions much like holding a contactless card up to a reader, it does not require the user's phone to have an embedded contactless chip.

Starbucks introduced the app last September in 16 stores and expanded it in March to all of its locations in Target stores, where the special bar-code scanners needed to read phone screens were already in place for Target's own mobile prepaid card program.

This month, Starbucks and the app's designer, mFoundry Inc., introduced a feature that lets the app check rewards points.

The Starbucks mobile payment system has some kinks to work out. In a test of the system by American Banker at a Starbucks in the Paramus, N.J., Target store, the scanner failed to read the bar code; the payment went through only after the barista read the card number off the phone's screen. Davidson attributed this problem to user error — customers and baristas alike instinctively try to "wave" the phone and the scanner in front of each other, but the system requires that both devices be held still.

Drew Sievers, mFoundry's co-founder and chief executive, agreed. "You would expect, obviously, there to be hiccups along the way, of course — but we've been pleasantly surprised with the absence of them in the scanning piece," Sievers said.

Davidson said these user issues would fade as more customers and baristas get accustomed to the mobile app. In the original 16 test stores, where the scanners are stationary (they are handheld in Target stores, increasing the likelihood that they will be waved), users took to it immediately.

"It wasn't a burst of activity that dropped off — it's continually growing," Davidson said. "Once they tried it once, they used it daily."

The system was especially popular with the office workers who frequent the initial test stores, he said. "In the 16 stores we did our trial on, we really did precious little marketing … and saw this almost viral behavior."

Because of the app's popularity, and its benefits to moving the line along, Davidson said Starbucks considers its early tests a success. "We are absolutely looking to expand," he said, but he would not say where or when.

Davidson was unsure whether the payment half of the app was crucial to customers' decision to use the reload half, though he acknowledged that when Starbucks announced an increase to the number of stores that accept mobile payments, it led to a spike in downloads of the app.

Banks could match Starbucks' success by pairing mobile access with debit cards. Even though customers can use mobile banking today to check balances and move money among their accounts, more would do so if they could also pay with the same device, Tubin said.

Tubin said the problem American Banker encountered when attempting to scan the phone's screen is not a major one. "You'd expect to have issues with a new type of payment," he said. "Even with plastic cards, sometimes the mag stripe doesn't work."

However, the problem underscores the importance of training as Starbucks further expands the number of stores that take mobile payments.

"For them, it's going to be critical that people at the checkout are completely and fully trained," Tubin said.

"They're the ones that are going to end up training the users … the better they are and the more they know, the less likely these problems are going to happen."