By Patti Murphy
Let's face it: when it comes to changing payment form factors Americans are slow to move on. After all, despite electronic innovations (cards, online payments, even fobs), consumers and businesses write billions of checks every year. So, why all the hoopla over smart phones? And how should policymakers address this new era of connectedness - in terms of policy and practices?
The Federal Reserve Bank of Kansas City took on these and related questions in May 2012 when it hosted international policymakers and academics at a conference titled Consumer Payment Innovation in the Connected Age.
Despite all the whiz-bang rhetoric, future visioning and talk of mobile payment acceptance, there is still much behind-the-scenes work to finish - policy setting as well as operational changes - before mobile devices become true electronic replacements for our wallets.
Reading through the proceedings of the Kansas City Fed's conference, I was struck by an idea put forth by Cambridge University professor Ross Anderson. Anderson, a security specialist, addressed risk and privacy issues; he took a swipe at the card networks in the process. He suggested an end-run could be made around the card brands by leveraging the automated clearing house (ACH) to support clearing and settlement of a mobile payment product.
"If the payment-card cartel is to be seriously challenged, then a mobile system backed by the ACH might be the way to do it," Anderson wrote. In fact, this is already being done, for example by PayPal Inc. and Dwolla Inc. "Mobile platforms might just possibly provide the opportunity to shake up the industry," he added.
But that can come to be only if mobile payments become cheaper to process than debit cards. ACH payments are significantly less expensive to process than card payments (less than a dime on a per-transaction basis). But there are tradeoffs: the ACH is a batch system, so it takes at least two days to receive good funds once payments are submitted.
In addition, there are no real-time authorization or payment guarantees when using the ACH like there are with the card networks.
Guarantees of user privacy and security are also crucial and problematic, since mobile services keep tabs on customers' cell location history, and this is sensitive data that needs to be protected under U.S. rules. Further complicating matters for U.S. firms is the lack of universal standards on exactly what personal information needs to be protected under various government rules. For example, a cardholder's ZIP code is protected under California's state privacy laws, but that's not the case in most states or under federal law.
Fraud, or at least the perception of fraud, also threatens consumer adoption of mobile payment schemes. "In short, the more 'modern' or 'cyber' a payment system is, the harder it seems to be to defend it efficiently," Anderson wrote. "This may be partly a learning effect, but externalities surely play a role, too. The takeaway message is that payment fraud is a large business." Indeed. At a projected total of $10 billion annually, Internet fraud, if it were a public company, would be valued at five times what MasterCard Worldwide raised with its initial public offering (IPO) of stock in 2006, or 55 percent of the amount Visa Inc. raised with its IPO two years later.
Of even greater concern: that $10 billion estimate could be dwarfed as more commerce moves to the Internet, which is sure to happen. "It's important to realize that the move online is associated with real improvement in social welfare because of efficiency gains, and the same will almost certainly be true of mobile," Anderson wrote.
This is already playing out in scores of developing countries where mobile technologies are helping to mainstream unbanked and underbanked populations. It's a bit ironic to consider that much of the momentum for mobile payments and other financial applications comes from under-developed countries, like Kenya.
M-Pesa, a 12-year-old initiative in Kenya led by the British multinational telecom company Vodafone Group PLC, is the granddaddy of all mobile payment platforms. And it's the simplest of systems, relying on short message service technology to initiate and receive notifications of payments. M-Pesa enables consumers to deposit money into accounts and store the information in mobile phones, to send and receive payments, and to access cash.
After charting successes in Kenya, M-Pesa is now spreading across Africa. According to the latest data out of Kenya, about four in 10 Kenyans now have M-Pesa accounts, and combined, they send 165 million payments over the network every month.
In addition, the success of M-Pesa has given rise to 140 similar mobile money systems in 65 countries, mostly in emerging markets in Africa, the Middle East and Asia.
In October 2012, Vodafone connected M-Pesa into HomeSend, an international remittance hub. The arrangement enables M-Pesa customers to send and receive payments through 21 international transfer businesses in 35 countries.
"Mobile changes lives. It also transforms societies and economies: a 10 percent increase in mobile penetration in a country equates to a 1.2 percent increase in gross domestic product," said Vodafone Director of Mobile Money Michael Joseph in heralding the company's latest expansion.
"We are now at the next stage of that growth. By breaking down national barriers to make mobile money transfer truly global and ubiquitous across all competing networks, just like text messaging today, we can further connect the world's huge unbanked population."
The unbanked are not just a phenomenon of developing countries either. As I reported in "Banks underserve the underbanked - AFS providers step in," The Green Sheet, Oct. 8, 2012, issue 12:10:01, the FDIC's 2011 National Survey of Unbanked and Underbanked Households indicated the ranks of America's unbanked continue to grow. Between 2009 - the last time the FDIC tallied up the market - and 2011, the unbanked had grown by 821,000 households.
Now consider that the Center for Financial Services Innovation reported in October 2012 that underbanked U.S. consumers spent $8.9 billion in fees for payment services (prepaid card fees, remittances, etc.) in 2011. That's a lot of money for banks to be leaving on the table.
And since many banks are rolling out mobile services to well-healed customers anyway, they should at least consider leveraging mobile to attract new customers who are presently unbanked or underbanked.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org>.
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