If mobile payments are going to ever catch on, and it's still not certain they will, bankers need to focus more on how people want to pay than on what merchants are doing to facilitate more card transactions.
While payments experts agree there is strong interest from banks and merchants in turning phones into mobile payments tools, top Wall Street analysts concluded at a May 12 American Banker roundtable discussion that there is far less demand from consumers.
In a wide-ranging discussion, the group debated the prospects of a spike in mergers and acquisitions among banking technology companies this year, the impact of interchange regulation and the future of mobile financial technologies. (For an edited transcript of the discussion, click here).
"Hasn't history shown that any type of new payment technology that focuses on the merchant never takes off?" asked Thomas C. McCrohan, a managing director for business services with Janney Montgomery Scott in Philadelphia. "Unless you focus on the consumer, these technologies never take off."
The analysts said that financial companies have put plenty of effort into developing mobile payments systems, but were divided over whether there is enough demand for innovations such as the mobile wallet — the notion that a phone could store multiple card accounts and be used to initiate contactless transactions.
"I don't think it's going to happen," McCrohan said. "It's a solution looking for a problem right now, here in the U.S."
One difficulty, of course, is persuading the wireless carriers to implement the needed payments hardware in their phones, and there is little progress seen in developing a business model that could spur them to do so.
"I don't see why Visa and MasterCard have any meaningful motivation to give up economies to either the carriers or the handset manufacturers," said Andrew Jeffrey, a managing director for equity research at SunTrust Robinson Humphrey. "I'm not a believer in mobile payments. I believe that there's a tremendous amount of smoke and absolutely no fire."
Others were more bullish, especially as consumers begin to realize the capabilities of smart phones.
"As more people manage their lives using a smart phone, I think the next step is a payment of some sort," said Brett Huff, a research analyst with Stephens Inc. "I think that online payments, and accessing services via mobile, will be a key driver."
For Greg Smith, a managing director for financial technology equity research at Duncan-Williams Inc., it all comes down to options. "People are going to want choice, and want to use different payment types at different times," he said.
Eventually, "you will be able to completely facilitate commerce on a mobile phone," he said, "but I do think it will take a long time."
Square Inc., the start-up offering a device that lets people accept cards using Apple Inc.'s iPhones, generated plenty of discussion, much of it critical. The analysts questioned its business model, which calls for Square to accept the risk for payments accepted by its merchant clients, and its pricing, which will likely have very thin profit margins.
Despite these caveats, several people agreed that there is value is offering card acceptance to very small merchants, whether the service is provided by Square or better-known companies such as Hypercom Corp. or VeriFone Systems Inc.
Mobile acceptance is "a pretty popular product. It's clearly something the press has picked up upon, and I think some consumers are pretty excited about it," said Darren Peller, a vice president and senior analyst for IT consulting and computer services with Barclays Capital. "I think it's something that shows the use, the potential use, of mobile for payments products."
Smith said the value in these systems is that they "open up a world of small-value payments, and for somebody that's taking payments infrequently, it makes perfect sense. But is that going to be a humongous market? Probably not, at the end of the day."
Several of the analysts criticized interchange rates, not because they are too high, but because they are too complex. "The complexity of those is the reason that many of the acquirers are able to get away with charging somewhat egregious spreads," Peller said.
Jeffrey said simpler rate tables would translate into more transparency, and ultimately less discord. "I think interchange would be less of an issue for merchants if they knew that when Greg walks in with a particular card they're going to pay X," he said. "A hundred pages of interchange rules are daunting for anyone."
There was less agreement about whether interchange should be regulated in Washington. "It's hard to see the benefits" of interchange regulations being set by lawmakers, Peller said.
And lower rates are not expected to translate into lower prices at retailers. "What happens if interchange comes down? Do they really pass that on to the consumer?" Smith asked. "No. They make more money. It just comes out of one hand and into the other, and the consumers lose because their rewards programs go down."
There was universal agreement that there will be increased M&A activity among banking technology vendors, largely because there has been so little in the past year. There is now a pent-up demand for deals, and buyers are sitting on cash that needs to be spent.
However, many of the big tech providers have already been bought, or merged with each other, and Smith predicted that the next notable trend would be for major vendors to get bought by even bigger tech companies that have a broad focus and want to hone their financial services expertise.
"To me, the next big wave is going to be an IBM or an HP making a run at one of these guys. I think that definitely will happen at some point, to get somebody like a Fiserv or an FIS, with banking expertise," he said. "The HPs of the world aren't growing dramatically anyway, so they don't need huge organic growth. If they could consolidate data centers and leverage that bank domain expertise, I think that could be a valid reason."
The conversation took place soon after reports emerged that Fidelity National Information Services Inc. was mulling a bid to sell itself to a group of private-equity companies. Though a deal never happened, Peller said buyers are eager to invest their money.
As soon as people feel "more comfortable that you're going to see banks continue lending, then I think you absolutely will see more deals," he said.
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