Samsung Pay — the mobile payment feature Samsung unveiled today — has the potential to become the dominant mobile wallet in the US.
While Samsung Pay offers an on-phone user experience similar to that of Apple Pay and Android Pay, it boasts a key advantage that could help it outpace its competitors in terms of payment volume in the near- to medium-term. In this note, we'll look at Samsung Pay's potential impact as well as how it works.
Samsung Pay can leverage one of three technologies to make payments: Samsung Pay can be used to make payments via near-field communication (NFC), Magnetic Secure Transmission (MST), and barcode-scanning.
Samsung Pay's main advantage is ubiquity of acceptance: MST technology emulates the magnetic stripe payment cards we are accustomed to using in the US. This means that Samsung Pay can be used at the vast majority of payment terminals in the US. If MST doesn't work for any reason, Samsung Pay will generate a barcode that can be scanned to make a payment. And as merchants make upgrades to NFC-compatible terminals, users will be able to make NFC-based transactions as well.
Why ubiquity of acceptance is so important: To drive mobile payment dollar volume, people have to actually make mobile payments. Apart from providing incentives like loyalty programs or offers, the best way to encourage usage is by making the payment method easy and its availability widespread. This enables adopters to develop a habit of using the mobile payment method. Adopters of Samsung Pay won't have to expend energy trying to figure out whether Samsung Pay is accepted at a merchant location, and this means that they'll likely keep using it. In fact, Will Graylin, Global Co-GM of Samsung Pay and CEO of LoopPay, told us that people ended up using Samsung Pay for about 40% of their transactions in beta tests in Korea.
Where Samsung Pay won't work: The biggest acceptance hurdle Samsung Pay faces is at gas stations, where making a payment requires a terminal's internal trigger to be depressed by a card. There are some workarounds for this, but it will be a while before Samsung Pay works at outdoor gas station terminals. Samsung Pay will have a similar problem at most ATMs as well.
A back-of-the-napkin estimate on Samsung Pay volume in the US: Samsung accounted for about about 28% of the 190 million US smartphone subscriptions as of June, according to comScore. We estimate that, with growth in smartphone adoption, this will come out to about to about 58 million Samsung phones in the US by the end of 2016. The average American spends about $20,000 on retail and food services. If 5% of those Samsung users have a compatible phone and use it for 40% of their spending, payment volume would reach $23.4 billion.
What Samsung gets out of this: It's not revenue from banks. Unlike Apple Pay, Samsung will not get a cut of transaction revenue from banks that provide credit cards to consumers. Instead, Samsung will build an ecosystem through which merchants can provide offers and loyalty programs to their customers. Exactly how the model will be structured is still an open question, but Samsung Pay is about more than payments — it's about building a new commerce ecosystem.
Like Apple Pay and the forthcoming Android Pay, Samsung Pay will have an advantage in that it will come preloaded on Samsung devices and will likely to partner with all four US major credit networks as well as most large banks. It will initially be available on newer Samsung devices: the Galaxy S6, S6 Edge and Edge Plus, and the Galaxy Note Five.
How it works
Card options: In addition to major credit cards, Samsung Pay will also be compatible with gift cards, store cards and loyalty cards. This could consolidate the mobile wallet experience for users from multiple apps (a payment app and a store app) to a single app.
Loading a card into Samsung Pay: Cards only have to be loaded into Samsung Pay once. To load a card into Samsung Pay, users have two options: to enter the card information and CVV, like making an online purchase, or to take a photo of the front and back of the card through the app and approve the data.
The card data is tokenized: Once a card is loaded into Samsung Pay, it is sent to MasterCard or Visa, and the card number is replaced with a surrogate value called a token. The token is then returned to the user's smartphone.
Opt-in data sharing: Ultimately, Samsung wants to build a program that enables customers to opt into sharing personal data so that the app can provide offers, deals, and discounts to particular users in particular stores. This feature isn't included in the current iteration of Samsung Pay, but it will soon be added.
Opening Samsung Pay: For users, Samsung Pay is designed with simple gestures that attempt to closely mimic the experience of using an actual wallet. Cards can be accessed with a simple swipe up from the home screen, lock screen, or sleep mode — no additional app needs to be opened. Samsung's goal is to streamline the process of using a mobile wallet so that users start to replace their wallets with phones, not supplement them.
Selecting a card: If a user has chosen to store multiple cards in the app, the default card at entry is the last one used to make a payment. To switch between cards, users simply have to swipe right or left until they reach the card of their choosing.
Making a payment: To pay, users open Samsung Pay and hold their device over the part of the credit card terminal where a magnetic stripe card would normally be swiped. The merchant will indicate when the payment has been made – usually, this is within seconds. The payment is then authenticated by the user through a biometric fingerprint or entry of a PIN, brought up automatically.