Perhaps more than its dual-edged smartphones, Samsung Pay has proven the hidden champion for Samsung Electronics in 2015, in terms of both public opinion and its potential.
The company's bottom line still comes from handsets and semiconductors, but the initial success of Samsung Pay may just be the catalyst the South Korean tech behemoth needs to sustain it in the coming years. The core of the mobile payment system is itself nothing original -- Apple, Google, and a myriad of players are doing it. But it's the electronics giant's first legitimate entry into the finance sector, and demonstrates it can use outsourced technology and directly integrate that into a meaningful service.
Injong Rhee, executive vice president and head of enterprise business at Samsung's mobile business, the man in charge of Samsung Pay, spoke with ZDNet at Samsung's headquarters in Suwon, south of Seoul.
"Just wait a year. To replace the wallet completely, perhaps, is too big a dream, and it probably won't come to that," Rhee said.
"Rather, it is a competition with the plastic card. More and more, all the plastic cards -- gift cards, membership cards and the like -- will go inside mobile. Our wallets will get thinner. Samsung Pay and wallets will complement each other, and this will create new value, and become a tool that makes ecommerce much easier."
Raising awareness, widening availability
When it comes to its home country of South Korea, Samsung has it locked down. As of October, the firm secured 1 million subscribers and hit 100 billion won ($88 million) in total transaction volume. Even with consideration of the fact that Samsung has the largest market share in handsets in South Korea, it is a rare success for the firm that traditionally sees its consumer-oriented mobile software services perform poorly, both domestically and globally.
North America, on the other hand, is a battlefield. Arch-rival Apple's Apple Pay got a head start. Android Pay is looming. And it is simply a larger place to cover compared with South Korea.
To stay competitive, Samsung is widening its partnership there. In October, Verizon made it official that it will support Samsung Pay. In Las Vegas on Wednesday, Samsung announced new cards from partners that will be available on the mobile payment app in the coming months. In total, four payment networks will be covered: American Express, Discover, MasterCard, and Visa. The four major banks there are now all available: Bank of America, Chase, Citi, and US Bank. And new financial partners, Blackhawk Network, First Data, Synchrony Financial, TSYS, and Vantiv will extend Samsung Pay use there.
"The US is a large market with a high number of stores so we are working harder on educating our partners and raising awareness," said Rhee. "Once Chase joins in, our coverage for banks will be around 60 percent to 70 percent, and more."
"Because we launched after Apple Pay, initially, consumers and our partners thought Samsung Pay would be more or less the same. And then there is Android Pay, so overall, Samsung Pay was not prioritised by our partners. But the market reaction was exceptionally good. People in the US wrote reviews and comments, asking for wider availability in different stores, and we went quickly up in terms of priority for our partners.
"In terms of transaction volume, subscribers, and use, the numbers always near double in proportion to how much we increase marketing and awareness. The effect is immediate," Rhee added.
Along with the announcement of the new partnership, Samsung is preparing a major update that will roll out sometime in November at the earliest.
New features added will include gift cards, membership cards and in-app purchases. The new features will be a boon for consumers, as well as Samsung, ahead of the coming holiday season, according to Rhee. User interface will also be slightly improved, with a new menu that will allow consumers to see all their registered cards at once. Updates will be done in the background so they don't interfere during payment.
"Our goal going forward is connecting Samsung Pay to online merchants. In Korea this is already available. If you go to an online merchant that already supports Samsung Card [Samsung's credit card issuing sister firm], it will ask whether you will pay using Samsung Pay. As more merchants join us, we expect [an increase in transaction] by the end of the year."
Wider device support
Currently, only flagship Samsung phones launched this year have Samsung Pay enabled: the Galaxy S6, S6 Edge and S6 Edge Plus, and the Note 5. Earlier in September, JK Shin, CEO and head of Samsung's mobile business, told reporters in Seoul that the mobile payment app will be expanded to low- to mid-end Samsung smartphones.
Having more of its handsets with the mobile payment app may be more important than it seems, because it is helping device sales in South Korea, according to Rhee. "Despite the strong push from headquarters, and high expectations for it to become a big business, our sales team initially had its doubts. But when Samsung Pay rolled out here, handset sales rose concurrently, and the sales team saw the benefits first-hand. Now our sales teams in other regions all want to do the same."
Rhee reiterated that Samsung Pay will roll out to non-flagship devices "within a couple of months", as well as the next smartwatch, for which he stressed that a finalised date has not been set.
Unlike rival services that only support Near Field Communications (NFC), Samsung's have Magnetic Secure Transmission (MST), courtesy of the LoopPay acquisition earlier this year, something touted as a key differentiating point from the get-go. It allows Samsung Pay to work with old mag-stripes and EMV terminals -- still widely used in the US and South Korea.
MST, put in the simplest terms, is a physical copper coil in the back of devices that is altered to a magnet by electricity. It then sends binary signals (0, 1) to readers.
Gear S2, Samsung's latest smartwatch, does not support the full version of Samsung Pay. It has NFC, but not MST, making it without its key point of differentiation compared to Apple Pay. This was not realised due to design and cost reasons, according to the executive vice president.
"There was absolutely no technological limitation, but it was a matter of design and cost. In this version [of the smartwatch, the Gear S2], it just happened to not have it because putting in MST would have made it a little thicker," said Rhee.
"[Since MST is simple and versatile] its application can be potentially expanded. Everybody does mobile payment now, and differences between them come down to small details. But that small difference, such as having MST or not, can be the difference between overcoming a challenge and failing to do so. That is what we are trying to do: look for that minimal thing that can give us a breakthrough.
"When the news of our LoopPay acquisition got out, we got some cold reactions, such as 'why buy an old technology?'. But we applied it to a service that can potentially change the use pattern of consumers."
Samsung claims three out of four Samsung Pay transactions were made via MST, rather than NFC. Though NFC deployment is ramping up, the advantage provided by MST will likely continue, at least for the next couple of years, in the US.
Besides the actual service itself, Samsung's acquisition of LoopPay and its direct translation into a direct service has gained particular attention in South Korea.
Samsung has had a long reputation in its home country of trying to do everything internally. As a sprawling mega-conglomerate with numerous affiliates with products and services in cross-industries -- even Samsung Electronics itself is divided into three "companies" -- outsourcing needs seemed not to be prioritised. Not to say it didn't do M&As, but many high-profile instances have been deemed a failure due to the inclusive culture.
In recent years, the conglomerate seems to have been actively trying to change this. Samsung's Global Innovation Center (GIC), the South Korean's San Francisco business that focuses on start-up facilitation and acquisition, was formed in 2013 and was behind the acquisition of SmartThings, LoopPay and Boxee. It was also behind the Gear VR -- a collaborative result with Oculus -- that grabbed attention in recent tradeshows.
Samsung has said during its conference call last year that through GIC, it wanted to siphon Silicon Valley's culture. So is Samsung actively trying to become more open, especially when it comes to integrating startups?
"We are open, yes. But I would not call it [a sudden] change [in strategy] ... I think it is a wrong impression. Rather, it would be correct to say that we've been preparing for this kind of change in approach from ten years ago," said Rhee.
"We are a big company. To change this, what we did first was hire new talents. We integrate those talents to foster a new culture. That new culture, I believe, made us more readily pursue acquisitions.
"For a startup to aim to go public, for them to take that road, there are many difficulties along the way. But by being merged and acquired, it can do things in a much larger scale than it could have by itself, which leads to the creation of wealth and value that they strived for. Going forward, many startups will lean on Samsung to fulfill these expectations."
It is still a long road. Rhee compared Samsung with Google -- while the latter practically grew from a mere search engine provider to a global titan by merger and acquisitions, the South Korean tech giant began in manufacturing, building its own factories and securing its supply chain by itself. The difference of origin requires a different approach, Rhee said.
Samsung's manufacturing origins have proven, most of the time, a competitive edge in the cut-throat competitive tech market. It is still number one in a diverse range of consumer electronics.
Being a hardware manufacturer also helps in making mobile payment systems more secure, according to Rhee. Samsung phones are currently "encased" in Knox, a mobile security solution which Rhee also oversaw the development of. Knox started off as an enterprise mobility solution but is now more widely applied, even in the consumer-level.
Samsung Pay has security in the service-level, thanks to tokenization, and at the hardware-level due to Knox, Rhee said. Each handset from its development stage is fitted with a fuse with Knox.
"If we did not have the security foundation we set with Knox, we would not have been able to start Samsung Pay. As a hardware manufacturer, this is the kind of technology we can leverage, unlike Google which just does operating systems. Knox will play a huge part in Samsung Pay of the future, as well as our IoT applications."
"After the wallet, what might be in need of a revolution may be your home key or your car key, or the car itself, and then there is the office. We have strong competence in many diverse consumer electronics that we can apply in a new context to these things that can meld into your regular life, which I think is what Internet of Things is."
Future of Samsung Pay
Samsung Pay is different to recent IoT initiatives in that it has proven a more direct encroachment to a different industry, in this case, the finance sector. For instance, for Smart Home, Samsung may collaborate with a house decorating firm, without both of them eating away each other's profits. But for Samsung Pay, a resistance has been noticed sporadically since its launch. Some in the finance market value chain have complained that mobile payment technology such as Samsung's eats away their profits.
"Mobile payment can be seen as a disruption of sort. But we are well aware that we cannot find growth alone. We want to find a win-win point where we can add value to their existing businesses," said Rhee. Rather, the conversation with potential partners can lead to a development of a new business model, he added.
"Speaking not as a Samsung executive, but personally, my opinion is that most evolution in the IT sector involves technology allowing legacy businesses to manoeuvre without traditional infrastructure by connecting them directly online. Uber and Airbnb are all good examples of this.
"AliPay is doing what banks are doing, because consumers now actively use online payment, and with that data, they can look at transaction behaviour and get more precise information. Technology will accelerate and hugely change the finance sector," he said.
Along this line, the ultimate goal for Samsung Pay is to have it cover a wider range of commerce activities, and, though only a goal for now, turn it into a one-stop solution in payment.
"For example, Samsung Pay is widely available where many people hang out. So we can develop a service that can have the consumer ask Samsung Pay, 'where is a good seafood restaurant in the area?' Though this is just hypothetical, these kinds of new services linked with Samsung Pay can lead to advertisement business for us."
"Our handsets are currently available in over 70 countries. Our plan is to deploy Samsung Pay to all of them in the next few years," said Rhee, adding that users will only rise for at least the next two to three years.
Rolling out Samsung Pay to other non-Samsung smartphones has also been considered during discussions, though Rhee stressed that it was just a consideration for now and there was no working-level discussion internally or with potential partners on the matter.
"From the beginning, we've considered providing Samsung Pay to our partners. But right now global expansion is happening so quickly for Samsung Pay that we are focusing all our energy on deployment."