Opportunities and challenges in mobile payments

In recent weeks, we have seen mobile payment launches by Google and Square.  These follow the creation of the Isis joint venture by AT&T Mobile, T-Mobile and Verizon Wireless.  Many of the leading banks (including Bank of America, Wells Fargo and U.S. Bank) are currently conducting mobile payment trials.  And a series of smaller players (e.g., Dwolla, Boku, Propay) have recently introduced mobile payment apps.

Mobile payments have the potential to capture to a significant share of spending in the coming years.  However, there are significant challenges to overcome in order to realize this potential.  These include:

  • Consumer privacy and security
  • Technological functionality and interoperability
  • Revenue-sharing among stakeholders: There are a diverse range of companies looking to gain a share of the emerging mobile payments market, including: banks; payment networks; payment processors; payment app providers; smartphone manufacturers; communications service providers; and merchants.  Each of these companies bring strengths and limitations to the table, and no one company can go it alone.  So, an effective and sustainable mobile payments model will need the involvement of multiple partners, each of whom will need to earn a return commensurate with their contribution.
  • Changing consumer behavior: Consumer spending patterns change over time, and consumers are moving away from paper-based payment methods and towards cards and electronic payments.  However, consumers’ payment usage patterns alter more gradually than many would expect (according to The Nilson Report, by 2015, checks will still account for 12% of consumer payment volume).  To encourage consumers to switch to mobile payments, marketers will need to:
    • Identify and target consumer segments with greatest interest in using mobile payments
    • Develop a value proposition and user experience for mobile payments
    • Determine which merchant categories would be most receptive to mobile payments
    • Identify which payment methods are most vulnerable to being dislodged by mobile payments, and clearly articulate mobile payments’ advantages to consumers and merchants
    • Create incentives to encourage first-time and repeat usage by consumers
  • Merchant acceptance: contactless payments have been around for some time, but fewer than 150,000 U.S. merchants can accept such payments, compared to the approx. 6 million merchants that can handle card transactions.  Many merchants will balk at the cost of equipping their point-of-sale terminals to accept mobile payments.  To overcome this, mobile payment stakeholders will need to:
    • Develop technology solutions that reduce the cost of mobile payment acceptance
    • Market the benefits of mobile payments to merchants, so that they are more willing to make the investment in mobile payment acceptance