MasterCard Mobile World Congress
Marce Martinez/AP Images for MasterCardMasterCard introduced its MasterPass mobile payment app at the Mobile World Congress in Spain in February.
By Emma Thomasson

BERLIN -- Big retailers are muscling in on the likes of Visa (V), MasterCard (MA) and Google (GOOG) in a fiercely competitive and growing mobile payment market that promises to cut transaction costs and increase customer loyalty.

Stores such as British supermarket Tesco and France's Auchan hope their "digital wallets" -- apps which allow users to pay with their smartphones rather than cash or cards -- will also give them more comprehensive data about customers' shopping habits than ever before so they can target advertising.

They are joining a crowded market -- banks, card companies and tech firms like Google and Apple (AAPL) are all entering the mobile payment business, each hoping their app will become the industry standard. eBay's (EBAY) PayPal,
well established in e-commerce, is also experimenting with the technology.

Retailers hope to attract customers to their own services by giving discounts and rewards to those using them, while also linking payments automatically to loyalty schemes and offering features like saved shopping lists.

The global market for mobile payments is forecast to grow about threefold by 2017 to some $721 billion worth of transactions, with more than 450 million users, according to research firm Gartner (IT).

The growth could benefit retailers as the competition from a host of payment providers should help drive down the fees stores pay to have transactions processed -- a service currently dominated by banks and card firms Visa and MasterCard.

"We view merchants as overall beneficiaries of the trend toward mobile payments," said Morgan Stanley (MS), which estimated retailers in developed countries spent up to $150 billion in 2012 to accept card payments.

"Expected returns should justify any incremental investments required in enabling mobile payments technology," it said in a report in January.

However, it is still unclear how the retail mobile payment market will develop, with card companies and banks seen retaining a leading role in processing payments even if physical cards become obsolete.

Retailers' apps might struggle to take off as customers are unlikely to be willing to use a variety of services for different stores, but the success of Starbucks (SBUX) in combining mobile payments with promotions shows big players can succeed.

U.S. Retailers

Starbucks, the world's biggest coffee chain, launched its mobile payment and rewards app in 2011. It already has 10 million users and the firm said this month it is looking for ways to expand the program beyond its own network.

"The mobile payments platform has given us a higher degree of frequency and higher degree of loyalty and the question is how can we leverage that beyond our stores," Starbucks Chairman and Chief Executive Officer Howard Schultz told CNBC television.

An alternative path is also being explored in the United States,
where dozens of top retailers including Walmart (WMT), Target (TGT) and Best Buy (BBY) have announced plans to set up a joint digital wallet service -- the Merchant Customer Exchange, or MCX -- though no launch date has been set.

Meanwhile, an attempt to create a mobile payment app universally accepted by retailers has recently launched in Germany. Yapital, owned by e-commerce firm Otto, has gone live in thousands of stores and also allows users to pay online and make peer-to-peer transfers.

Yapital Chairman Nils Winkler expects just a few players to survive of the 200 initiatives now clamoring for attention in Europe, with apps tied to retailers more likely to win out than those being developed by telecom and card firms.

"The biggest success in this field will be retail-based. PayPal is a good example that has grown tremendously based on the retail success of eBay," he said.

'Clear Business Case'

Tesco, the world's third-largest retailer which pioneered the tracking of customer behavior with its Clubcard loyalty card two decades ago, will launch its digital wallet this year, as it also starts offering current accounts.

That is part of the British supermarket chain's eventual plan to use smartphones -- and its own-brand Hudl tablet computers -- to allow customers to navigate stores with their devices and scan products to buy them as they shop.

Sophie Albizua, co-founder of U.K.-based retail consultancy eNova Partnership, said her clients were ready to invest in overhauling outdated till systems to enable mobile payments. "People spent the last five to 10 years fine-tuning their websites. Now they have time to focus on something else."

French supermarket group Auchan, Europe's fifth-biggest retailer, launched its "Flash and Pay" electronic wallet about a year ago. It combines payments with coupons, loyalty cards, receipts and a shopping list feature.

"Our objective is to minimize costs. To have alternatives to existing solutions. All other solutions try to make costs for merchants," Arnaud Crouzet, Auchan head of global payments, told the Merchant Payments Ecosystem conference in Berlin.

"It is difficult to imagine our data on our customers going through a third party," he added.

Britain's Centre for Economics and Business Research said there was a clear business case for digital wallets in terms of reduced costs and improved customer service and sales.

U.K. retailers could have saved 463 million pounds ($770 million) in transaction costs in 2013 by shifting to mobile payments from cash, credit and charge cards, it estimates.

Mobile payments could reduce lines in stores by speeding users through checkouts and cut the cost of handling cash and card payments, it said.

Handling cash -- which accounts for over half retail transactions by volume in Britain -- is costly for retailers as it needs to be counted and guarded, costs equivalent to about 2.5 percent of takings, compared with about 2 percent for processing cheques and 1 percent for debit and credit cards.

However Carrefour, the world's second biggest retailer after Walmart, thinks shoppers need more time to be convinced.

"For the moment, cards are still a good solution, especially contactless ones," said Frederic Mazurier, a vice president for finance and risk management at Carrefour Banque. "It is going to take quite a few years more."


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