The recent explosion of new mobile-payment initiatives, from new startups backed by heavy venture capital to formidable players such as PayPal Inc. is enough to give the average banker heartburn.

Was it a mistake to wait for Near Field Communication technology to become widely available before investing in mobile payments? Will telecommunication carriers possibly outflank banks with their own mobile-payments platforms (see story)? Or are banks wise not to jump on the bandwagon to provide person-to-person payment capabilities when consumer demand is still relatively low (see story)?

For most consumer banks, the stakes for choosing the right path in rapidly developing mobile-payment platforms appear high, and for good reason.

“Mobile is catching the banking industry a bit off guard right now because of the rapid pace of development of new initiatives, which in turn is being driven by the rapid pace of smartphone adoption,” Bob Hedges, managing director of the global business-advisory firm AlixPartners LLC, tells PaymentsSource.

Smartphone penetration in the U.S. is increasing at a rate of about 1% per month compared with about half that a year ago, Hedges says, citing his firm’s proprietary data.

“It sounds incremental, but 12% a year is actually a very fast pace for consumers that are rapidly adopting a whole new set of mobile applications for banking and payments that will likely make a huge difference in how consumers decide where to bank,” he says.

More than half of U.S. consumers will have smartphones in the next two to three years, Hedges estimates. And with that will come “a freight train of consumer adoption of all kinds of mobile activities, which will certainly include payments,” he says.

Banks still have the upper hand, as AlixPartners’ research suggests more consumers prefer to receive mobile banking and payment services from their banks than with unknown new players, Hedges says.

But banks must “step up their games,” and fast, to hold on to that role with consumers, he suggests.

“The payments industry perhaps has been misfocused in paying too much attention to contactless technology,” Hedges says. “Our data show that using a mobile device for shopping and purchasing within a browser or mobile application will be a much bigger factor than the specific hardware used to check out at the point of sale.”

Moreover, banks may have underestimated the role merchants will play in emerging mobile payments, he says.

“Mobile shopping, including targeted couponing and location-based services, will be the launch pad for mobile payments, as smartphones will increasingly be the tool consumers use to assist them in shopping,” Hedges says. “It only makes sense that payments would flow from those applications.”

One flaw with NFC is that “so far it has been more focused on the technology and not on consumer behavior,” Hedges contends. “NFC puts the cart before the horse.”

In fact, fully developed NFC payment technology includes immediate, two-way communication between a mobile device and the payments provider or merchant and robust security, analysts note.

“So far, NFC provides what appears to be the best level of security for mobile payments,” Mark Bower, vice president at Cupertino, Calif.-based data-security firm Voltage Security Inc., tells PaymentsSource.

But unless NFC and contactless payments “provide a real exchange of new, really useful information, … then you will not see much adoption,” Hedges says. “To the extent that mobile-payment rollouts are just a substitute for existing technology infrastructure and a compelling case for consumers to use it is ignored, we’re going to be sluggishness in adoption.”

As the ultimate path to widespread mobile-payment adoption emerges, banks should be working quickly to build the most robust mobile-banking platforms possible, with handy methods for tracking spending, transferring balances and paying bills, and they should prominently tout those capabilities to customers, Hedges says.

Providing trustworthy, affordable person-to-person payment technologies is another way banks can help build mobile-payment branding efforts, he says.

“P2P payments don’t score very high in terms of what consumers need at the moment, but for banks it helps build mobile capabilities, demonstrates that you’re innovating and strengthens the connection with customers,” Hedges says.

Hedges recommends no specific technology, but he says banks must begin to determine ways to play a central role in helping consumers manage their relationships with merchants and block newcomers that might steal that role. Examples could include developing applications that help consumers track their various merchant loyalty, prepaid and gift cards, he suggests.

“Banks need to take a lead role in driving the connection between the consumer and the merchant, ultimately helping to stitch together diverse programs in one location the consumer can trust,” Hedges says. “Banks should be the ones assembling the applications and programs to help consumers run their financial planning and shopping lives because consumers don’t have the time. The opportunity is there for banks to play the main role in mobile payments, but they need to make some bold moves.”

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