Editor's Note: This is the first in a two-article series covering the current state of mobile payments. The second article will be published April 8, 2013, in issue 13:04:01.
Are mobile payments on the cusp of going mainstream? Perhaps, but first all the pertinent players must reach some type of consensus on how to proceed. Is near field communication (NFC) the way to go? What about two-dimensional bar codes called quick response (QR) codes and popularized by Starbucks Corp. as a mobile payment approach? And what about data security? Should information needed to authenticate and transact payments be stored on a chip, on a phone-based app or in the cloud?
These are some of the issues being debated among bankers, merchants, networks and mobile phone companies. "The market is wrestling with a lot of questions," said payments industry consultant Paul Martaus. Besides the obvious questions about technology and approaches, there are also unanswered questions about security and about how credit and debit card regulations should be applied to mobile payments, he added.
Sandy Shen, Research Director at Gartner Inc., offered a similar assessment. She expects the market for mobile payments to remain fragmented for at least the next two years, with access technologies, business models and partners varying by market.
"The most successful next-generation payment product will be considerate of a wider range of stakeholders in its design and allow them to impact the user experience according to their business need and still-evolving industry dynamics," said Patricia Hewitt, Director of Debit Advisory Services at Mercator Advisory Group.
Chris Gardner, co-founder of Boston-based Paydiant Inc., concurred. Paydiant developed a mobile wallet and reward platform that banks and retailers can private-label. It's a cloud-based software solution that works with existing POS systems and smart phones - no retooling required.
Paydiant offers the platform to ISOs and their sales partners through an arrangement with Vantiv Inc. The company also partnered with outsourcing giant Fidelity National Information Services (FIS), which counts as clients more than 14,000 financial institutions worldwide; FIS integrated the offering with its mobile banking platform. Additionally, Paydiant sells direct to large merchants, Gardner said. He believes banks are advantaged when it comes to mobile wallets. "They're in the best position to have mobile wallets that many consumers will use," he said.
Paydiant is just one of more than 100 mobile wallet products vying for market position today. The following are among the most talked about.
NFC is a standards-based wireless communications protocol that establishes radio connections via touch between devices, like smart phones or chip-enabled keychain dongles, and compatible card readers. Its one major shortcoming is that few small to midsize retailers have POS devices that support tapping in addition to card swiping.
"Ninety percent of all card transactions are initiated at Tier 1 merchants," Martaus said. "The processors and equipment manufacturers aren't having an easy time implementing NFC."
And it's not just merchants shunning NFC. Apple Inc. took the technology off its drawing board, opting instead for QR codes that support mobile ticketing and loyalty apps, for example - but not yet payments - for its latest line of iPhones. As of mid-2012, about one third of all U.S. smart-phone subscribers used iPhones, according to comScore, a digital analytics firm based in Reston, Va.
When ACI Worldwide asked NRF members to chime in on the situation, 13 percent said there weren't enough smart phones with NFC to warrant an investment in NFC-enabled terminals. Forty-four percent said a lack of common standards was throttling mobile payment adoption. Nevertheless, Jeffrey Hale, Senior Vice President, Retail Payments at ACI, said the survey "confirms our belief that 2013 will be an important year in the growth and acceptance of mobile payments."
For their part, consumers seem less than enthralled with mobile wallets. "It's actually easier to pay with a credit card than it is to use a mobile app," Martaus said. He cited an example of standing in line to order a double latte. First, you pull out your mobile device and key in a PIN to unlock it.
Next, you scroll through apps, open the payment app and then hope the screen doesn't go black before it's your turn at the register. "With a credit or debit card you just pull it out of your wallet and hand it to the cashier," Martaus noted. What could be simpler?
"NFC payment involves a change in user behavior and requires collaboration among stakeholders that includes banks, mobile carriers, card networks and merchants," Shen said. "[W]e don't expect NFC payments to come into the mass market before 2015. In the meantime, ticketing, rather than retail payments, will drive NFC transactions."
Martaus believes the industry is headed in the direction of QR codes. But Steve Mott, Chief Executive Officer of the consultancy BetterBuyDesign, isn't convinced. He noted that NFC transactions are considered card-present, whereas those authorized using QR codes are treated as card-not-present transactions. "QR codes are penalized in the current card world," Mott said.
QR codes are two-dimensional bar codes that have proven useful for mobile advertising and marketing, especially when incorporated with social media and geo-location technologies. Starbucks, with its proprietary wallet, and Apple are two of the biggest names championing QR codes. The Apple Passbook uses QR codes to support gift, loyalty, rewards and ticketing applications, with real-time updates. Several large banks, including Bank of America Corp., have been testing QR codes for marketing and payments, as well.
Europay/MasterCard/Visa (EMV) is a chip-based protocol named after the card brands that first promulgated it. (Europay is no longer an independent card brand, having been folded into MasterCard in 2002.) According to the Smart Card Alliance, EMV specifications "were developed to define a set of requirements to ensure interoperability between chip-based payment cards and terminals" and contain embedded microprocessors that "provide strong transaction security features and other application capabilities" not possible with mag stripe cards.
EMV supports NFC technology and has been shown to reduce the potential for fraud when coupled with PIN-based authorization. EMV enjoys significant penetration in Europe and Asia but has been slow to be adopted in the United States.
Globally, 76 percent of POS terminals and 45 percent of cards are EMV-enabled, according to an October 2012 Javelin Strategy & Research report. Yet in the United States, just 10 percent of terminals and 1 percent of cards are EMV compatible.
Javelin, nonetheless, is optimistic that mobile payment adoption (especially NFC-based payments) has the impetus necessary for retailers to invest in dual-interface terminals - those that can support contactless NFC transactions and wallets as well as mag stripe cards.
According to Beth Robertson, Javelin's Director of Payments Research, NFC will ultimately be the leading technology underlying mobile wallet solutions, and "implementing EMV standards will facilitate that." Robertson characterized Apple's decision not to include NFC with its latest iPhone models as "a near-term choice." She added that over time, network incentives will drive merchant adoption, and Apple will NFC-enable future iPhone models.
Other experts envision a marketplace with multiple mobile wallets using different technologies. Gardner said he expects at least 10 options, a number that is likely to include the leading card brands and a half dozen or so private-label products. "In the end, it all comes down to trying things," he said.
Most players "are making multiple small bets on mobile wallets," said Taylor Vaughan, Director of Treasury Management Services at First Tennessee Bank, when he spoke at the Bank Administration Institute's Payments Connect conference in March 2013. Banks will want their cards in each mobile wallet that makes the final cut, Vaughan suggested. Also at BAI's Payments Connect conference, Bill Gajda, Visa's Global Head of Mobile Product, said, "Making multiple bets is smart."
Getting consumers to use the wallets is essential, too, and that's not yet a given, outside of popular applications like the Starbucks wallet. "We're hearing less from consumers and a lot from merchants," noted Todder Moning, a Product Innovation Director in the Global Payments Innovation Group at U.S. Bank.
One reason for merchant interest is the quest for new pricing models, said Dekkers Davidson, an independent consultant and former Head, Mobile Commerce Business at Barclaycard. "It has to be compelling; it has to be simple," he said.
Mark Horwedel, CEO of Merchant Advisory Group, said the driving force for merchants is their desire for cheaper payment alternatives. "This obsession with mobile is being driven by merchants' issues with interchange," he said. Speaking at BAI's Payments Connect, Horwedel took several shots at card interchange and the Visa and MasterCard rules. "If you're really serious about wanting merchant cooperation, let's not just focus on mobile," he said. "Simply porting today's world over to mobile is not going to work," he said.
Davidson added, "All the rules are up for reconsideration." And that is one reason why mobile payment options have the potential to reshape the payments universe.
Following are highlights from recent industry research on mobile payments:
MasterCard hired the international research firm Prime Research to produce the first global Mobile Payments Social Media Study, which tracked 85,000 related comments across Twitter, Facebook, and online blogs and forums around the world over a six-month period.
Here are some key findings:
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