Why 2014 could be the year mobile payments explode on the iPhone

Richard Crone had been on the road a few days recently when his smartphone did something unexpected: It started sending him special-offer coupons for breakfast at Starbucks.

Why the sudden largesse? Well, Crone has the Starbucks mobile payment app installed on his phone—and as he traveled the country, buying coffee with that app, it started to learn his habits. Instead of merely acting as a digital wallet, the app also began to serve as the virtual version of a “loyalty card”—one with a more proactive approach than merely offering discounts for money spent.

“I was traveling for a week, made a lot of Starbucks purchases,” says Crone, whose consulting company is tracking the rise of the mobile payment sector. “And they started to send me offers for breakfast purchases.”

And that Starbucks app is just one indicator that 2014 could be a very good year for mobile payments on the iPhone.

“The payment itself is the starting point,” says Matt Kiernan, director of marketing for LevelUp, which offers its own mobile payment and develops white-label payment apps for individual businesses. “Once you start there, you unleash the ability to do all these other great things.”

Experts say mobile payments could grow to as much as $6.2 billion this year. While big merchants like Walmart and Target are banding together to create apps, smaller restaurant and coffee chains have already dived in; even New York’s Metropolitan Transit Authority has started discussing replacing some of its smart cards with smartphone apps.

“It’s all going to hit this year,” Crone says.

And while Apple’s iPhone isn’t even close to cornering the mobile-payments market, the growth of that particular platform is definitely a driving force in the rise of such payments overall.

Growing quickly

Starbucks, of course, has been a pioneer in the mobile payment sector, which now represents a significant portion of the coffee chain’s overall business. Maggie Jantzen, a spokeswoman for the company, said the company’s app was being used by more than 8 million customers, who have used it to pay more than 11 percent of all transactions at Starbucks’ U.S. and Canada stores.

“We are encouraged by how our customers have fully embraced our mobile apps as the most convenient way to pay and to keep tabs on their loyalty rewards,” Jantzen says.

But branded apps are just one way consumers will use mobile payments, Crone says. Banks will also develop their own apps—”Mobile banking is growing five times faster than Internet banking,” he says—and third-party providers like LevelUp, Square Wallet, Google Wallet, PayPal, and more will continue to grow that business.

“Some would say the consumer is going to have one wallet (app),” Crone says. “The fact of the matter is there isn’t one card or credit card today,” pointing to the credit, debit, and loyalty cards that can often fill a consumer’s pocket. “There will be all three types of ways of making payments” on the iPhone as well.

So far, eateries seem to have led the way in pioneering the field. In addition to Starbucks and Chop’t, outfits like Saxby’s, a Philadelphia-based coffee chain, and Taylor Gourmet, a D.C.-based hoagie joint, have also jumped in and seen results.

“Coffee is a very habitual product for consumers to consume,” says LevelUp’s Kiernan, which created apps for Chop’t, Saxby’s, and Taylor. “We picked this market as a starting place, because it’s the place where tying habit to loyalty is easiest to kick off.

Saxby’s launched its app in December. “We’ve had unbelievable success,” says Richard Rollier, the company’s director of technology. “I think we expected to, but it’s nice to see adoption rates. At some of these locations, we’ve sustained more than 20 percent” of transactions through the app already.

Taylor Gourmet’s David Hahn says the loyalty program was being utilized three- to four-times more often as his chain’s old loyalty card. That means regular customers are marching in the door even more often, to redeem rewards. “It definitely engages people more,” he says of the app. ‘It puts (your business) on the forefront of (customers’) thought process.”

But mobile payment apps won’t stay confined to the food sector. Dozens of merchants—including Walmart, Target, Lowe’s, Old Navy, and more—have banded together to form the Merchant Customer Exchange, which should be unveiling its own mobile payment app later this year. “Right now the team is heads down working on the product,” says Linda Walsh, “and not ready to share details just yet.”

Where’s Apple?

Some Apple observers have worried the iPhone will be left behind in this sector because it lacks near-field communication (NFC) technology, which Android phones and Google Wallet exploit to enable making payments simply by swiping your phone near a merchant’s scanner. Apple-based apps scan QR codes, instead.

But experts say Apple’s share of the mobile market is big enough that the financial-services sector is happy to accommodate the company. LevelUp, for example, doesn’t use NFC technology with its apps—though programming is built in to switch that service on, if Apple’s approach ever changes, without major revisions of code.

“It hasn’t been an issue at all,” LevelUp’s Kiernan says. Anecdotally, merchants surveyed by Macworld each say that iPhone users comprise more than half their mobile payment customers.

In fact, Crone says, Apple possesses a huge advantage over other companies if it chooses to pursue the mobile payment sector more aggressively than it does in current iterations of Passbook: It has credit card information for half-a-billion customers already.

“That gives them a huge leg up,” Crone says. “Can they extend that huge base to making payments at the physical point of sale? The answer is clearly yes.”

Whether Apple makes that move or not, though, the mobile payment field should begin to grow quickly—and not just because merchants love it so much. It also makes life easier for consumers.

“Our goal is to be the easiest place to get your lunch,” says Chopt’s Marsh. “People demand instant gratification. They’d also like an unencumbered experience. Everything should work smoothly.”