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The Future of Mobile Payments

November 2011

Jennifer Windh: Welcome to the Federal Reserve Bank of Atlanta's Payments Spotlight podcast. Today we're joined by David Evans, who is the founder of Market Platform Dynamics, a veteran consultant in the payments industry, and the [co]author of Paying with Plastic, a guide to the history and economics of card payments. David will be speaking to us today about the future of mobile payments in the U.S.

David, thanks for joining us.

David Evans: Thanks a lot, Jennifer. Glad to be here.

Windh: So, earlier this year, you wrote a blog that was fairly dubious about the carrier-led mobile payment initiatives. Can you describe the context for that piece and explain the reasons for your skepticism?

Evans: So, this back when Isis was being talked about, and the idea was that the carriers were going to form a joint venture and try to get something off the ground. The source of my skepticism is—I think that the likely role of the carriers in payments is basically being a pipe. It's not clear that they really have any relevant skills needed for running mobile payments, and I think that it's more likely that they're going to turn out to be a very important source of pipes for other people developing mobile payments alternatives. Obviously, they would all like to get a piece of the mobile payments pie, but just the desire to make money doesn't mean that they're going to achieve that. With rare exceptions, most of the mobile carriers that have tried to get into payments—not just in the U.S. but in other parts of the world—again, with rare exceptions, have not been very successful.

Windh: Well, we really haven't seen too many mobile payments taking off at the actual brick-and-mortar point-of-sale so far in the U.S. What do you think are the main barriers to mobile payments adoption of that form in this country?

Evans: There are two interrelated main barriers. Barrier number one is that there is not a very persuasive mobile payments alternative for consumers to use at the point-of-sale, and the second is that there's really not the technology at the point-of-sale capable of processing a mobile-payments-type transaction. So, kind of working back from that one, in order for a mobile phone to be used as a payments device at the point-of-sale, there has to be some way of transmitting that information to the merchant's point-of-sale technology and that has to be NFC [near field communications], or bar code, or browser-based, or something, and, at the moment, I think, as is well known, a very small number of merchants have NFC at the point-of-sale and have little motivation to adopt it. (Bar code may work for some of them.) So, there isn't a lot of technology at the physical point-of-sale for mobile payments to work.

In order for merchants to be motivated to want to interrupt the process at the point-of-sale, in order for them to want to invest in new point-of-sale technology, they're going to have to be persuaded that there are a lot of consumers out there who want to use a mobile payments alternative at the point-of-sale. Now, in order for consumers to want to do that, there's going to have to be something really persuasive for them. And I think a fundamental problem at the moment is, no one has really come up with a great way to use the mobile phone at the point-of-sale that is really compelling for consumers. So, there's a barrier on both consumer adoption and on merchant adoption.

And then the final barrier—that I will just mention—is that there's a real hurdle for anyone coming up with a mobile payments alternative, which is that they have to beat something that at the moment works extremely well. So, at the moment, I can pull out a credit or a debit card at the point-of-sale, I can swipe it, and it works beautifully. Takes about a second. No fuss, no muss—the clerk knows what to do. The technology is all there. So we have this wonderful system that works really well right now that's extremely efficient. And, in order to persuade consumers or merchants to do something different, someone's going to have to come up with a really great alternative that adds value to the merchant and adds value to the consumers to make both of them want to do something different than [what] they are currently doing.

Windh: I've always heard it said that the U.S. has a great payments system when you compare it with a lot of countries in the world, and that's why I think a lot of people are confused when they see mobile payments taking off in some other select countries around the globe. Do you have a theory for why mobile payments might have gotten more traction in some Asian and African countries than they have here?

Evans: Yes. I think there are two different reasons depending upon the geography that you're talking about. Japan and Korea are the two countries where mobile payments have been the most successful. The country that most people are focused on is Japan. But it is extraordinarily idiosyncratic in so many different ways. There was not a wide-scale penetration of credit cards as a means of payment at the point-of-sale. On the other hand, for various reasons, in Japan, the mobile phone became the de facto computing device for a lot of people. In addition, there was a dominant mobile carrier in Japan that was able to, basically, come up with a solution where they were dictating to the manufacturers and so forth exactly what kind of mobile phone needed to be produced, how it was going to be used as a payments alternative, and so forth.

So, I think it's a mistake for anyone really in the U.S. or developed countries to be looking at Japan as a model for mobile payments. I mean, it's interesting to see what they have done, but things are not going to evolve in other places as they have done in Japan. It's just kind of "one of a kind."

The situation is different, I think, in some of the African countries. I wouldn't say in the African countries—take Kenya, for example—that it's so much mobile payments that have taken off, it's mobile banking. So if you look at M-PESA in Kenya, that's a mobile banking alternative. It's a way to move money. But that's a country where there wasn't even really a very well-developed banking system, nor was there a well-developed landline telecommunications system. And M-PESA was able to ignite itself because it was able to provide an alternative to people that were basically moving money across the country by, in some cases, giving money to a taxi driver or a bus driver and saying, "Hey, take it to mom 300 miles away out there in the countryside." So, there was a specific need in Kenya that a mobile payments and a mobile banking alternative was able to meet. Again, a very, very different situation in developed countries.

I think that where we are going to see mobile payments take off around the world is primarily in countries that do not already have a very well-developed payment card industry with acceptance at the point-of-sale and that have very well-developed mobile phone systems. So the places to look at in terms of important geographies are places like India, where mobile payments is sort of the obvious thing for the Indians to do. I think in other places it's going to develop much more slowly for the same reasons that we are encountering in the U.S.

Windh: That makes a lot sense. We've already seen a couple of different technologies for mobile payments, kind of, launch in the U.S. with maybe trials or limited rollouts. Do you have any predictions for which mobile payments technologies might have a chance to take off here? Do you see NFC or bar codes winning, for example, or maybe no one wins and there are several options in the marketplace?

Evans: I don't think there are going to be several options in the marketplace. I think that the way things will shake out is we'll end up standardizing on NFC, or on bar code, or on something altogether different. I think in order for mobile payments to really take off, there's probably going to need to be a particular kind of technology that consumers become used to using and that merchants become used to accepting. So, I do think that there will be a winning technology. I think that it is very difficult at this point to predict what that winning technology is going to be. NFC, I think, is still in the running to be the winning technology, but I think that anyone who is confident that NFC is going to be the winner is deluding themselves.

What is it going to take to be the winner? Well, it's going to have to be a technology that the entity that comes up with the killer solution that persuades consumers and merchants to really use mobile payments decides it wants to use. So, if it turns out that the Google wallet and the Google payment solution turns out to be the really, really compelling proposition, then I think that it is quite possible that Google could drive the adoption of NFC at the merchant point-of-sale, in which case I think there is a good prospect that NFC will become the standard technology that we use at the point-of-sale to use mobile phones with.

I think it's also possible, however, that someone—and perhaps someone that is not even on our radar screens at the moment—will come up with a really neat bar code-based system, or some other system that's based on both the consumer and the merchant interacting in the cloud, using browsers. So, I think a bar code- or a browser-based, or one of those could also succeed, but, again, it depends upon someone coming up with a great solution. So I think it's really the solution that is going to drive the adoption of a particular acceptance technology at the point-of-sale rather than the acceptance technology driving the solution.

Windh: Well, David, thanks for giving us your perspective today on mobile, and I know we'll be waiting to figure out what really happens in the future.

Evans: Thanks a lot, Jennifer. We should talk about this in ten years when we may actually know the answer.

Windh: Exactly. Again, we've been speaking today with payments industry expert and consultant David Evans. This concludes our Payments Spotlight podcast on mobile payments.

You can find more information about the Retail Payments Risk Forum by visiting our website at www.frbatlanta.org. Thanks for listening, and please return for more podcasts. If you have comments or questions, please send us an e-mail at podcast@frbatlanta.org.