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Are mobile payments reaching a tipping point in the US?

The growth of mobile payments in the United States has stalled largely because the market’s diverse stakeholders have been unable to build compatible business models. But is the tipping point at hand?

The various players’ unwillingness to work together has further slowed the integration of supporting technologies such as Near Field Communication into handsets and has delayed merchant adoption of acceptance devices. However, while many market participants are struggling to achieve dominance in market share and revenues, the threat of losing out to alternatives continues to grow.

“Here in the U.S., the mobile payments market is evolving relatively slowly,” said Beth Robertson, director of payments research at Javelin Strategy & Research, Pleasanton, CA. “It’s behind many other markets globally, partly because we had more advanced landline services and we have a more extensive banking network than countries where mobile has been used for banking where people can’t access regular banks, payment networks or traditional landline networks.

“We are at a point where the market is beginning to accelerate,” she said. “There is a big push globally expanding the use of mobile transactions, and that gives more validity to mobile payments’ utility and reliability in our market as well.

“The technology is advancing on a number of different fronts, creating a more active and competitive environment, so players are going to be forced to make a more aggressive move if they want their model to be the one that is coming to the forefront.”

Mobile payments are poised to move rapidly ahead if stakeholders can identify and shape the right business models, technologies, consumer perceptions, and experiences to support growth.

Both MasterCard and Visa have trials scheduled for large-scale peer-to-peer mobile payments.

“Both organizations are pursuing a variety of different development initiatives around mobile, which can involve contactless payments,” Ms. Robertson said. “Both have contactless solutions that were initially card-based but can also be used as mobile solutions.
A Javelin survey conducted July-Sept. 2009 found that, of the top 40 banks in the U.S., 18 were offering mobile banking services, and of those 72 percent were offering mobile bill payments. Since last year, those percentages have undoubtedly grown.

For financial institutions, establishing the right partners and the types of agreements that can allow those partnerships to function in a strong manner is key.

For consumers, education will help the industry get over the next hurdle.

“Trials are really important from a consumer perspective, because as they try out mobile payments they become more comfortable and share their interest with friend and family, creating a snowball effect to the market,” Ms. Robertson said.

MicroSD offers a new approach to NFC
Mobile contactless payments and a wealth of other applications enabled by NFC are coming to mobile handsets over the next 12 months, but not in the format originally envisioned.

A lack of commercially available NFC-embedded handsets combined with the rise of mobile handsets with microSD slots has helped shape a new approach to NFC that promises to bypass both handset vendors’ and mobile network operators’ core involvement, according to ABI Research.

ABI Research’s latest NFC study splits NFC IC forecasts into three key NFC markets: mobile handsets, computer and consumer electronics, as well as peripherals for mobile handsets.

These three markets combined will help drive significant NFC uptake, and NFC ICs will approach 300 million shipments in 2015.

Last year, more NFC ICs shipped for use in computers and peripherals than for handsets, and a new alternative platform is also emerging.

New microSD offerings with NFC functionality are coming to market, joining stickers as a way to bring contactless connectivity to existing mobile handsets.

Mobile handsets remain the key market for NFC but increasingly the potential of the technology is driving NFC into other devices and form factors, according to ABI.

The potential to offer NFC to handsets with microSD slots is helping to change the mobile handset landscape for many NFC vendors and supporters.

Carriers remain the gatekeepers for mass NFC handset rollouts, but over the next five years the emergence of microSD cards alongside other offerings such as active and passive contactless stickers will provide mobile users with initial access to mobile contactless payments.

These options also provide a more direct route to potential consumers for financial institutions looking to deliver contactless mobile phone payments.

Combined, these changes will provide renewed incentive for handset vendors and their major carrier customers to start delivering embedded NFC handsets.

There are also opportunities for consumer electronics device makers to lead in the commercialization of NFC where it can provide simple connectivity between same-brand devices.

“NFC has not been fully deployed in mobile handsets, which is considered a limitation in the market, but there are workarounds that can be deployed such as stickers or microSD chip that can be inserted into the phone to enable contactless payments functionality,” Ms. Robertson said.

“That can encourage increasing usage,” she said. “Embedded NFC chip technology has been trialed—for example, Citibank ran an NFC trial in India using Nokia phones.”

Mobile payments: developed versus developing
In developing markets, companies focus on offering money transfer/remittance and prepaid top-up to drive mobile payment because these are the most popular services by the unbanked and underbanked.

In developed markets, mobile commerce is driving adoption by building on existing ecommerce infrastructure and user behavior, according to Gartner.

NFC stickers are encouraging adoption due to the novelty effect, though that is still a very niche segment.

Major retailers such as Amazon and eBay have been leveraging online user profiles for mobile transactions that can ease data entry on the mobile side.

Other merchants offer pricing comparison, inventory check and product pick-up reservations that appeal to users that are not yet ready to do transactions over the phone.

“This helps by educating the user and getting them familiarized with mobile applications,” said Sandy Shen, China-based analyst at Gartner. “Retailers and vendors are still experimenting with designs to deliver a good user experience on the phone.

“They cannot simply extend the online sites to mobile and expect them to work in the same way as on the PC,” she said. “User behaviors are different when they are on the move, and limitations of the mobile phone mean they won’t allow heavy presentation or data entry on the device.

“Also they need to make use of the phone technology—location, camera and connectivity such as Bluetooth to make the service more relevant to each user’s context.”

There are important issues that need to be addressed to move the mobile payments ecosystem forward.

“Currently mcommerce is a single retailer-to-consumer experience—each may use different technologies, and users need to have multiple applications to access multiple merchants,” Ms. Shen said. “Ideally, there needs to be a consolidated mobile mall/wallet that uses a single solution and links to a range of merchants so users can install once and access multiple services.

“This will come at a much later stage, as a huge amount of collaboration is required between the mall/wallet provider, vendors and merchants,” she said. “The point solution we have today will exist for quite some time before a more collaborative model emerges.”

For developed markets such as the U.S., the very sophistication of the financial services and telecommunications industries can be a factor impeding consumer adoption of mobile payments due to an “if-it-ain’t-broke-don’t-fix-it” mentality.

“In terms of consumer adoption in a mature market, mobile is an important channel, but it is complementary—it’s just another channel,” said Alex Kwiatkowski, principal analyst of financial services technology at Ovum, London.

“Mobile banking and payments becomes more interesting for underbanked and unbanked consumers, for whom access to financial services are much more restricted,” he said.

For example, in sub-Saharan Africa and pockets in some of the poorer nations in Asia, having access to a banking branch or an ATM machine is actually a rarity.

More than 1 billion people worldwide have access to a mobile device but do not have a bank account, according to Ovum.

“Mobile is giving them the power to make financial transactions, whereas before there was very little infrastructure making them able to do it,” Mr. Kwiatkowski said.

The Gates Foundation is making huge investments in Africa to give unbanked and underbanked consumers access to financial services.

However, the transactional part of the equation is missing in certain markets. The exact role of banks in the mobile payments arena is still an open question in the U.S.

“Mobile payments are an intrinsic part of mobile banking,” Mr. Kwiatkowski  said. “Can you make payments through your mobile devices today? Yes you can, through your mobile browser, going to a retailer’s mobile Web site, selecting an item and entering your credit or debit card.

“Where it’s getting a little murky, the industry hype is running ahead of reality,” he said. “There is a big wave of noise around contactless payments, NFC chips embedded into mobile devices or labels stuck on after the point of initial sale, so banks have to exercise caution.

“If banks want to get their customers using contactless payments through them, they have to be a catalyst to get mobile payments going.”

Mobile commerce, the act of making payments through a mobile device, is something that banks and retailers and everyone else in the ecosystem can actually promote today.

“There is no magic business case to be invented—mobile payments [via the mobile Web] is something that is real and can happen today,” Mr. Kwiatkowski said. “Players in the ecosystem have missed this very obvious target staring them in the face.

“They see the future being this contactless world, waving the device at a reader, but from  a consumer adoption standpoint, how do you make consumers comfortable using their device to make payments that way?” he said. “You can’t brainwash them, and the number using contactless mobile payments is still very small, so how do you stimulate consumer demand?

“The missed opportunity is not making more about simple mobile commerce, where you don’t have to have the latest Palm Pre, iPhone or Android device, you don’t have to have the 2010 model in order to be making mobile commerce—payments using your mobile device—happen, as long as you have connection to a reasonably high-speed network.”

While NFC offers the possibility of closing the loop on marketing campaigns and converting loyalty programs into sales, as well as driving impulse purchases, mobile payments via SMS, the mobile Web and applications  are more realistic, and still quite attractive, targets for many retailers.

“With banks, card networks and even some of the handset manufacturers a lot of the focus is about contactless payments,” Mr. Kwiatkowski said. “Recalibrate your sights and start focusing on mobile commerce that you can do today—otherwise you’ll chase your tail pursuing emerging technology that has a small user base.

“It’s not just about an iPhone, it’s not just about creating an app—consumers need to have some ability to use their devices to make mobile payments, whether through a merchant or retailer or a peer-to-peer payment,” he said.

“Just because the technology can do it doesn’t mean the consumer wants to make a payment in that way.”

Barriers to adoption
The biggest barrier to mass-market adoption of mobile payments is the various players in the ecosystem figuring out a revenue-sharing model that everyone is happy with.

“There is a lot of activity in person-to-person payments—if I know your mobile phone number I can send you some money,” said Red Gillen, Portland, OR-based senior analyst at Celent. “In terms of using mobile phones as a form of payment, tap-and-go technology, the banking industry is lacking a clear business case to do this.

“There’s been a lot of soul-searching, because the nirvana of mobile banking was mobile payments at the point of sale, but they found that it’s not that simple,” he said. “There are a lot of economic and business issues that are preventing banks from jumping into this such as preinstalled NFC chips and retailers upgrading their POS to contactless terminals.

“People haven’t figured out who is going to pay for that and who will benefit—it hasn’t been that well rolled out in the U.S., although it’s a very different situation in Japan.”

The question remains: If mobile banking is to progress to the point where phones are used for mobile payments by a large segment of the population, how will the incremental expenses be covered?

“Do mobile payments constitute cannibalization for banks?” Mr. Gillen said. “If I swap out a piece of plastic for a mobile phone, from  a bank perspective that’s not incremental volume, that’s just swapping out one form factor for another.

“The real issue is how do we use mobile technology to increase spend on the bank’s product?” he said.

The answer is integrating mobile payments with mobile marketing and loyalty campaigns.

“The Japanese use case features mobile marketing, promotions, couponing, which is going to be an extremely important factor encouraging trials and adoption of mobile payments,” Mr. Gillen said. “To take advantage of the switch from dumb plastic to a mobile phone that can interact with you, it has to be mobile couponing, promotions and loyalty programs.

“Mobile payments alone are not that meaningful, but promotions that get them that closed loop are really important,” he said.

Future looks bright
Some industry insiders have a much more optimistic view of mobile payments.

“Mobile payments are at a tipping point for mass-market adoption,” said David Schwartz, head of product and corporate marketing at Obopay, Redwood City, CA. “A lot of people had their first interaction with mobile payments earlier this year with mobile donations for Haiti.

“Roughly 5 million people used their phones to text donations to Haiti, which showed that mobile payments is taking off and can add value to people’s lives,” he said. “It also totally bypassed the banks—potential competitors to the banks include PayPal and carriers, and they’re moving in, so banks need to move quickly.”

Mr. Schwartz said that about half of all mobile phones sold are smartphones, a fact that increases opportunities for banks, merchants, marketers and service providers.

“Mobile banking also taking off, but we see mobile payments doing for banks what online bill pay did a few years back,” Mr. Schwartz said. “If you look at the early days of online banking, it was basically online brochures, while the second wave was checking balances and transaction history, but it didn’t take off until people had a reason to come back regularly, and online bill pay provided that.

“It’s the same dynamic with mobile banking,” he said. “The mobile payment option helps drive usage.”