Primetime for Amazon Pay

Amazon long ago mastered e-commerce, and now its payments unit is making moves in physical stores and in voice commerce. Will it succeed here as it has online?

In the fall of 2009, a certain big company in Seattle launched a service that let consumers authenticate themselves for online purchases with a favorite phrase and a PIN. By the spring of 2012, the service was no more.

In the summer of 2014, that same company sought to join the burgeoning ranks of mobile-wallet providers with a wallet app of its own, just ahead of Apple Inc.’s launch of Apple Pay. As with Apple Pay, the Seattle company’s new wallet worked on its proprietary line of smart phones. Just six months later, the app was discontinued.

Also that summer of 2014, the company came out with a mobile point-of-sale product to compete with Square Inc. and a host of other vendors aspiring to equip small merchants with the ability to accept cards with a smart phone. That entry lasted until February 2016.

The failed products were, in order, PayPhrase, Amazon Wallet, and Local Register, and the company behind them was, of course, Amazon.com Inc., the colossus of e-commerce.

Observers accustomed to the seemingly unending story of success that is Amazon may be startled to hear that not all the retailer touches turns to gold. But Amazon has a way of learning from its mistakes, and these days that virtue may be nowhere more evident than in its payments business, which it takes very seriously, indeed.

So seriously, in fact, that consumers are already using Amazon Pay, the company’s payments service for non-Amazon sites, for transactions in the real world.

Starting last summer, they could order ahead at TGI Fridays restaurants and a few other stores using a new service called Amazon Pay Places. And starting last fall, Amazon opened Amazon Pay, which claims at least 33 million users, to developers for purchases through its Alexa voice-commerce service. Participating merchants so far range from TGI Fridays to Atom Tickets, a digital-ticketing service for movie theaters.

“We see great potential here. There are tens of millions of Alexa-enabled devices out there, and the whole experience is built voice-first,” says Patrick Gauthier, a former PayPal and Visa Inc. executive who is vice president for Amazon Pay, in an e-mail interview.

Just how far into the physical world might Amazon extend its payments capabilities? The online merchant already operates a handful of bookstores and Kindle popup stores. It’s also created a testbed convenience store for employees to experiment with a concept called Amazon Go that does away entirely with the conventional checkout.

But the question really took on urgency last summer when the company shelled out $13.7 billion to buy the 470-store Whole Foods grocery chain. About any payment plans here, the company is keeping quiet. “That’s not something I would speculate on,” says Gauthier.

‘Gone to Mars’

With the possible exception of PayPal Holdings Inc., Amazon in its 23 years in business has done more than any other company to meld two crucial steps in payments: checking in (authenticating yourself) and checking out, so that they are practically one in the same process.

The idea is to capture user credentials once, and then store them for all subsequent transactions. Making this work in split seconds across a base of about 330 million active accounts is easier to describe than to pull off. But Amazon long ago became more of a tech shop than an e-commerce merchant.

“Amazon does technology better than anyone else I know. They’ve gone to Mars without stopping at the moon on the way,” says Joe Kleinwaechter, an electrical engineer by training who is vice president of innovation and design for Worldpay Inc., a massive payments processor.

Tech prowess is key, but not everything. Of those 330 million active users, about 100 million are members of Prime, the company’s top-shelf set of services like free two-day shipping. Prime members, who pay $99 a year for the privilege, shop more frequently, and spend more, than non-Prime customers.

Not only that, but Amazon customers now go to the site ahead of other places to research products, in this sense out-Googling Google, says Marc Freed-Finnegan, who was product lead for the original Google Wallet and is now chief executive of San Francisco-based Index, which markets technology to speed up EMV transactions. “Increasingly, customers begin their shopping journey on Amazon,” he notes.

So Amazon attracts consumers, makes it easy for them to order and pay, and ships merchandise for one- or two-day delivery, in some cases free. It does this for itself as well as third-party sellers on its site. How potent is that combination? Quite potent, if done right. “An active enrolled user is just as valuable as closing a sale,” says Richard Crone, principal at Crone Consulting, a San Carlos, Calif.-based payments consultancy.

Greasing the Skids

The key, of course, is the stored payment credential for each customer. That method enables the fabled single-click purchase that greases the skids not only for e-commerce but ultimately for mobile payments and voice commerce.

Amazon patented its 1-Click payment routine in 1999 and happily raked in licensing revenue from Apple Inc. and other online-store proprietors over the years. By the time the patent expired last year, the method had given rise to logical extensions like PayPal’s 1-Touch.

The whole idea is to get rid of irritating online forms, which are bad enough on standard-size keyboards. For mobile transactions, they can be the kiss of death.

With Vacatia, an online vacation-booking service that uses Amazon Pay, single-click is crucial. “Two-thirds of our customers are mobile, which makes figuring out an easier checkout process incredibly important,” says Mike Janes, chief marketing officer for the 5-year-old San Francisco-based company.

Having access to that back-end data is also important because most of Vacatia’s visitors are first-time customers, given the company’s startup status, Janes says. He won’t specify his conversion rate with Amazon Pay, but says the method is the site’s “most successful payment option.” Vacatia also accepts credit cards, Apple Pay, and an online-financing option called Bread.

A bonus for Vacatia lies in a “huge overlap” of Prime members and family-vacation decisionmakers, Janes adds. “Amazon is exactly my demographic,” he says.

Getting Physical

Now Amazon is ready to move that sort of experience to the physical world. Last July, it announced Amazon Pay Places, which allows users to deploy Amazon Pay within the Amazon mobile app.

The “Amazon Pay in-store program,” as Gauthier styles it, relies on the Clover point-of-sale system from the huge processor First Data Corp. Clover is a line of portable devices that process payments and work with a library featuring apps that automate a wide variety of business functions.

Right now, it’s available at “select” TGI Fridays locations and some other eateries that use Clover, Amazon says, without being more specific. Users can order ahead using the Amazon Pay feature in the Amazon app and show up later to pick up their meal.

But you can bet physical-world payments won’t stop there. Amazon is clearly relying on the popularity of its app to sell Amazon Pay to more merchant categories. When checked at mid-January, the Amazon app ranked first in downloads in the shopping category and 16th overall, according to ranking service App Annie.

“Given its wide distribution and use, we’re looking to expand the ability to use Amazon Pay in the Amazon app beyond restaurants to other types of retail and goods,” says Gauthier.

Just within the restaurant category, there is plenty of potential as well, particularly if Amazon can sell users on the idea of displacing specialized order-ahead apps. “With Amazon Pay in store, Amazon customers no longer need to download another app to enjoy the convenience of order-ahead experiences from a range of local restaurants from a familiar flow in the Amazon app,” Gauthier notes.

At the same time, Amazon Pay transactions are increasingly mobile, Gauthier says, noting that almost one-third of payments came from a mobile device in 2016. “We expect that number to continue to increase,” he says. That should make it a bit easier to sell users, particularly those loyal Prime users, on tapping the app for physical-world shopping.

‘The Stepping Stone’

The big question mark here is the role Whole Foods will play in Amazon’s payments plans. Amazon is mum on this matter, but most observers see Amazon Pay moving into those 470 stores sooner rather than later.

Crone, for example, figures the fastest route into the stores would be via familiar barcode readers. Unlike near-field communication, barcodes are easy and familiar to most mobile users. “I’m sure Patrick [Gauthier] is thinking this is the path of least resistance,” he says.

But a more intriguing technology lies near Amazon’s Seattle headquarters in an experimental c-store open, for now, only to company employees. Here, sensors at the doors and on all the shelves follow customers throughout the store, tracking what they put in their baskets and what they put back on the shelf. The final total is charged to their account as they walk out.

The result is a physical store that does 1-Click one step better—it gets rid of checkout altogether. Amazon calls it Amazon Go. The company won’t say when it will be introduced to the public, but both Crone and Worldpay’s Kleinwaechter figure it will be this year some time.

For his part, Kleinwaechter says Amazon Go’s complexity, involving multiple sensors and cameras tracking multiple customers at the same time, means Amazon will take the time it needs to get it working right—even if it has to take flack for it. “We will probably see some stores open in late Q1 or early Q2, but this is very tricky to do,” he says.

Getting it right, though, could have implications well beyond the experience of no checkout. It could, for example, yield a bonanza of data that Amazon could sell to food marketers and other interested parties, according to Crone. Knowing in real time what a customer is picking up, marketers could deliver offers to her phone for a related item while she is still in the aisle.

Once Amazon Go is proven, Amazon could offer it to third parties, following the model of Amazon Pay. “Amazon Pay is the stepping stone to Amazon Go,” says Crone.

A Choice And an Echo

But when it comes to getting rid of checkouts and other sources of what the payments business calls “friction,” few technologies can top voice commands. Amazon’s Echo line of devices, introduced only a few years ago, features a form of artificial intelligence called Alexa, which speaks with a feminine voice, recognizes human speech, and performs tasks according to so-called skills.

In November, Amazon opened Alexa to outside developers to program commerce functions into their skills. The offering includes Amazon Pay “so that customers can easily pay for goods and services in your skill,” according to a Nov. 29 Amazon blog post.

With what Gauthier says is an installed base of “tens of millions” of Alexa-enabled devices, buying via Amazon Pay may get even easier. Voice, says Gauthier, is “the most natural and convenient user interface. We see great potential here.”

For now, the program is in “private beta” with TGI Fridays, Atom Tickets, and a few others, he says. Amazon is accepting applications to participate on its Web site.

‘Weakest Form of Authentication’

Over the years, Amazon has proved to be as canny a technologist as a merchant. But for all its technical prowess, there remain problems it may not be able to overcome. One such issue is the competitive nature of retailing.

Most observers agree that while Amazon may sign up plenty of mid-size and smaller sellers for Amazon Pay, bigger retailers will remain unmoved, fearful of sharing even a scintilla of customer data with a resourceful rival. Also, some big chains, such as Walmart, Kohls, and CVS, have proprietary mobile wallets of their own. “I do not expect to see large merchants partnering with Amazon in physical stores,” says Index’s Freed-Finnegan.

That means Amazon Pay’s penetration in the grocery segment, aside from smaller stores, could be limited to Whole Foods. “I can’t see any of the top 10 grocers putting Amazon Pay in their stores,” says Crone. “If I’m a smaller grocer, I’ll do whatever I need to do to stay in business.”

Another issue lies in the nature of voice commerce. Here, Amazon is pouring tons of development dollars into a capability Gauthier calls “natural” and “convenient” for consumers, but others have some doubts.

“I’m challenged by payment by voice. The voice is the weakest form of authentication,” insists Kleinwaechter, who is nonetheless a big fan of the Echo device, using it to control the lights in his home and to maintain his grocery list.

One way or another, though, Amazon is coming to the physical point of sale. The company won’t address its business motives, but observers see an obvious one. “They can’t get the growth they want by just being an online retailer,” says Kleinwaechter.

That motive has pushed much innovation over time at Amazon. Now the question will be whether ventures like Amazon Pay Places, Amazon Go, and Alexa for Amazon Pay will succeed—or wind up on that list with PayPhrase, Amazon Wallet, and Local Register.