This blog describes why only 12% of all merchant POS payments can be done via NFC walles payments. This is the “egg-side” of the chicken-egg-and-rooster dilemma: NFC Wallets are dead which I inroduced in my last blog. I cited three funnels for NFC wallet payments to ever to happen
- 1) The Consumer “Chicken” funnel — how many consumers are able to transact with an NFC wallet?
- 2) The Merchant “Egg” funnel – how many merchants are NFC enabled at the POS?
- 3) The Service Provider “Rooster” funnel – how many service providers (e.g. banks) will have enabled their services (e.g. payment cards) in such a way that they are both enabled at the POS and accessible in the consumer’s wallet?
For a successful NFC wallet payment, all 3 conditions must be met.
In an additional blog, I also described my assumptions regarding the Consumer “Chicken” side of the dilemma in more detail estimating that only 3% of all mobile subscribers are able to transact with an NFC Wallet.
Today, I would like to detail my assumptions on the Merchant “Egg” funnel and apply simple pipeline economics to demonstrate that only 12% of all merchants might be able to accept NFC payments.
The Merchant “Egg” Funnel
To enable a merchant to accept NFC-enabled payment wallets, 5 preconditions must be met. These make up the the merchant “egg” funnel.
The first 3 funnel stages are merchant-profile specific: the merchant must: (1) run a brick-and-mortar business; (2) accept payments other than cash via a Point-of-Sale (POS) terminal or an Electronic Cash Register (ECR); and (3) accept card-based payments from a payment scheme like Mastercard or Visa. The two additional funnel stages are NFC-specific: the merchant must (4) have an NFC-enabled terminal and (5) train his staff to accept NFC payments.
Let’s look at each funnel stage in detail to derive assumptions for each stage of the merchant “Egg” funnel:
Stage 1: Brick-and-Mortar Business
Some sectors have been utterly consumed by web-based shopping. With an 80% share, the impact on the music and video industry has been tremendous (an unsurprising finding given the developments in downloadable media) and it is followed by books, electronics, and clothing. Some sectors, however, have barely been touched by the online retail boom (examples include health and beauty, food, and DIY, each accounting for less than a 6% share of online retail sales). For stage 1 of the merchant funnel, let’s assume positively that brick-and-mortar business accounts for 90% of all retail sales.
Stage 2: Accepting cashless payments
We live in an increasingly cashless society. In 2011, despite the economic crisis, non-cash payment volumes grew globally by 5.0% to 304.8 billion transactions. Whereas in the U.S., more than 70% percent of all point-of-sale purchases are cashless, in Europe, cashless payments only account for 30% of all retail transactions (with an extremely high variance across countries).
Let’s take the positive assumption that 70% of all POS purchases are cashless.
For stage 2 of the of the merchant funnel, this results in 63% cashless payments (70% of all retail sales left in stage 1).
Stage 3: Accepting scheme card payments
Cards take market share from all instruments across all regions. In 2011, cards continued to take market share from every other non-cash instrument in every region. North America is the most significant cards market, with 65% of non-cash transactions made via a payment card. In Europe, cards accounted for 41% of non-cash transactions.
We should further exclude the number of closed-loop card payments, as these services are unlikely to have sufficient scale to transition to NFC wallet payments (compared to NFC card payments). Shoppers deployed closed loop cards and prepaid cards for less than 10% of purchases made with plastic.
So, let’s assume that 60% of all cashless transactions are open-loop (“scheme”-based) card payments, which take the percentage of payments at the third stage of the merchant funnel down to 38% (60% of payments left in stage 2)
Stage 4: NFC enabled POS
NFC adoption at the POS has been painfully slow in the US, with larger retailers holding off on replacing existing POS terminals while they debate Durbin impact and interchange fees. Despite the lackluster support of NFC in the US, contactless transactions in Europe, Australia, China, and ASEAN are accelerating at a measured pace. With countries like France, UK, Australia, Poland, etc. recording volumes of contactless transactions (done with contactless cards) in the 20-40% range, the US with it’s 1% of contactless “card” transactions looks shabby by comparison.
If 40% of POS accepting card payments become NFC-enabled, that would seem to be a high number. This takes the number of NFC-enabled payments down to 15% of all payments in stage 4 of the merchant funnel (=40% of payments left in stage 3).
Stage 5: NFC savvy staff
The importance of staff training and POS integration cannot be emphasized enough. From my own store check experience, it is not rare that a sales clerk has no idea what I am talking about if I want to pay contactless (yes, even if the POS is NFC enabled). Last time, the clerk reluctantly brought over the manager. She stared at me and couldn’t figure it out and tried calling another store. Again, no idea what was going on. Then she called the POS support line before they figured it out (this is a painful process a normal user would clearly not go through).
Again, let’s be optimistic and assume that 80% of all clerks are trained well enough. That yields a penetration of 12% of all merchant POS which are able to accept contactless payments via an NFC wallet (80% of payments left in stage 4).
You can see that the assumptions regarding merchant acceptance of NFC wallet payments vary highly across regions. Nevertheles, we believe that we have applied overall assumptions in a positive way. Do you agree with them? Happy to hear your opinion …
In the coming weeks, we will publish a further blog on the Service-Provider “Rooster” Funnel and introduce the Chicken-Egg-and-Rooster Calculator so that you can test your own assumptions and calculate the maret share of NFC Wallet Payments for your region.