Mobile Payments 0.9: Why Is the Tech Forever Stuck in Beta?
Mobile technology is radically changing the way people hail taxis, book lodging, consume entertainment and find prospective dates.
So why hasn't the same kind of revolution taken hold when it comes to how people spend money?
Years of efforts by banks, payment networks, tech startups, wireless networks and retailers have failed to a produce a mobile wallet app that's broadly used and accepted. This despite near certainty among the technology and pundit class that the much-anticipated migration to mobile payments is inevitable.
There's no simple answer to why mobile payments keep failing to gain traction in the market, but a close look at what's gone wrong so far could provide clues to what — if anything — could provide a decisive breakthrough.
Too Old to Fail?
Though relatively few U.S. consumers have made a habit of paying with their phones — and only a fraction of merchants have switched on Near Field Communication capabilities at terminals — it is important to note that mobile payments have some successful niche use cases.
Millennials are using PayPal's Venmo for in-app and person-to-person payments, and mobile card readers such as Square are driving growth among smaller merchants.
But generally speaking, the bulk of payments are still stuck in cash, checks and plastic cards, the latter two of which are not just slower but vulnerable to fraud.
The current environment isn't lacking in options. Mobile payments can operate with browsers and apps and on a variety of device types, or they can be narrowly focused to work at just one retail location or chain, or even span the online and physical retail channels.
Mobile payments can turn jewelry, apparel and objects into payments devices through the use of wireless technology such as NFC and Bluetooth, as well as through the growing Internet of Things.
Visa, MasterCard, American Express and even retailers like Walmart have set up shop in Silicon Valley to be near the crucible of digital development where much of this innovation is taking place. Some are exploring taking payments beyond the phone to other form factors, such as Visa's use of NFC payments-enabled rings at the Rio Olympics.
But all the dazzling new technology on deck doesn't change the fact that in a mature market like the U.S., cash and cards are getting the job done well enough, and they're not leaving pain points big enough to spark a widespread demand for change.
"People are happy to try new products if it makes their lives easier and they see an immediate benefit, but when it comes to moving their own money around, consumers tend to be cautious and entrenched habits die hard," said Greg Burch, vice president of strategic initiatives for the U.S. arm of Ingenico, a French maker of payment terminal hardware that has shifted its global business model to include mobile and e-commerce payments processing.
The U.S. also has one of the highest saturation rates in the world of credit cards, and more debit networks than any other nation. This leaves consumers with plenty of payment choices too firmly rooted to easily displace.
China, by contrast, lacks a deeply entrenched credit card culture and has far fewer debit cards per capita, so consumers have been more receptive to adopting new payment methods such as Alipay and Tencent's mobile payment services Tenpay and WeChat.
Nearly 200 million Chinese consumers have adopted mobile payments via NFC handsets, up about 46% over last year, according to recent data from eMarketer. By 2020, about half of the Chinese population will routinely use mobile devices to pay for goods at retail checkouts, eMarketer predicts.
Not so in the U.S., where NFC-based mobile wallets like Apple Pay, Android Pay and Samsung Pay have seen only tepid interest from consumers, and it's not because of a lack of NFC-enabled smartphones and payment terminals. Even Apple Pay's earliest adopters barely used the mobile wallet after enrolling, according to Pulse's annual Debit Issuer study and testimonials from various credit and debit card issuers.
Contactless mobile payments "haven't taken off because there isn't a critical mass of consumers or merchants who can use them, and they don't address a real problem," said Eric Grover, a payments industry consultant who's been studying mobile payments technology for years.
A Retailer's Perspective
Any chance mobile payments have of capturing meaningful market share will reside in large part with retailers' willingness to promote their availability. Right now, that's an unlikely scenario.
Take the case of Perverse Sunglasses, a Los Angeles eyewear seller that launched this spring. Perverse wanted a single, streamlined approach to accept payments at events, online and at its stores. It has yet to find one that meets all of its needs.
"As much as digital payments is growing, it's still very much not working," said Alison Dean, vice president of operations and strategy for Perverse Sunglasses.
Since a splashy launch at the Coachella music festival in California in April, Perverse Sunglasses already has had to use two different, incompatible mobile payments systems for in-person payments — one from Square Inc. and another from First Data Corp. — while turning to yet another provider, Shopify, to handle its e-commerce site.
"Starting out fresh, we thought surely we could find one approach to accept payments, but after a lot of research, we found that what worked best for us at the point of sale didn't work online, so we're using different payments systems, and it's not ideal," Dean said.
Perverse was required to use Square's technology only temporarily, because of an exclusive deal Coachella cut with the San Francisco-based mobile payments company. But even at Coachella, mobile payments weren't the first choice among tech-savvy, eager-to-travel music fans. In that environment, where 100% of the payment terminals were equipped to accept mobile payments, mobile devices accounted for only about 10% of all food and merchandise sales over Coachella's two weekends, a Square spokesperson said.
"I don't think there's one company that has mastered the problem of payments," mused Dean. "The payments industry is plagued by disconnection points, with no easy way to transfer data, and everything you try to do seems to involve the undoing of all kinds of other related businesses."
Friends or Frenemies?
The most vexing challenge for banks, payment networks and tech companies could be finding common ground, particularly since these companies are known to be viciously territorial.
There have been many efforts to form alliances along industry lines; telcos, merchants and credit unions have separately put forth their own mobile payment initiatives. But too often, the companies behind these partnerships grew distrustful of one another.
Some retailers that initially supported NFC payments have disabled the technology at their terminals out of competitive interests. Other companies may have the technology in place but provide little to no signage to indicate to shoppers that they accept mobile wallets.
Banks, which initially showed enthusiasm for the card-tokenization approach to NFC payments Apple Pay introduced in October 2014, seem to be getting cold feet about working with technology companies to support handset-based NFC mobile wallets.
Though Apple Pay preserved a role for bank brands and plastic cards, issuers quickly worried that they would lose top-of-wallet status by participating in Apple's mobile wallet. They have also vocalized concerns about Apple's fee of 10 to 15 basis points per transaction.
Working toward an alternative, Wells Fargo and Capital One have separately launched their own cloud-based proprietary mobile payments apps, and JPMorgan Chase is going a step further by building the Chase Pay app on top of its closed-loop ChaseNet system. ChaseNet represents transactions where the consumer and merchant both have a relationship with Chase, giving the bank a chance to streamline the payment process and cut costs for the stores that support it.
But these signs of progress may soon be drowned out by even louder signs of protest. Instead of making necessary concessions for a mobile payments ecosystem to benefit all, major industry players keep sparring over the territory they risk giving up in that process.
Visa and PayPal seem to have found common ground in an alliance announced in July, but the announcement itself reads more like a legal settlement than anything else. As recently as May, Visa CEO Charlie Scharf suggested his company would be forced into a new level of "fierce" competition with PayPal over the alternative payment provider's practice of urging consumers to fund their PayPal accounts via cheaper ACH transfers instead of with credit or debit cards.
The new alliance dismantles that practice on PayPal's end, but it's not a complete end of hostilities. Primarily, it unites Visa and PayPal against a common enemy: The tech companies that seek to push both of them away from the point of sale.
"People talk about 'frenemies,' and there is no such thing in my mind. You are either one or the other."
PayPal's Bill Ready, senior vice president, global head of product and engineering, suggested that territorialism within the payments industry is holding mobile payments development back.
"We care more about growing the pie than just protecting our part of the industry," Ready said at the Electronic Transactions Association's annual meeting in April.
But from Visa's perspective, PayPal is absolutely being territorial. "I've been very consistent with what I have said about PayPal," Scharf said at a conference in May. "People talk about 'frenemies,' and there is no such thing in my mind. You are either one or the other … What they do as a business is not good for us or for our clients."
In addition to the business issues and the lack of demand for NFC, there are other problems being introduced by the payments industry's ongoing efforts to improve data security.
Chip Cards' Awkward Timing
There is no debate that one of the biggest recent obstacles in mobile payments' path was the unfortunate timing of the U.S.'s long-overdue transition to more secure EMV ("chip and PIN") payment cards. The card networks set a liability shift deadline for October 2015, which posed an incentive for merchants to prioritize EMV deployment above all else. EMV-chip cards are designed to deter counterfeiting, and are more commonly used outside the U.S.
Though most modern EMV-enabled payment terminals have NFC technology built in, many merchants are either keeping the NFC feature disabled or downplaying its existence.
Some merchants have refused to support NFC for strategic reasons. One of those is Walmart, which this month nationally rolled out its proprietary Walmart Pay app, which uses a different technology. Another is CVS, which switched off NFC in favor of the ill-fated CurrentC wallet.
Walmart Pay also is designed to work with Bluetooth beacons, which communicate with shoppers' phones via a short-range Bluetooth signal. In this way, beacons can provide coupons to consumers as walk from aisle to aisle, and Walmart already has 22 million customers signed up for its app.
"Walmart will know when people who've enrolled in the app are in the store, and using their purchase history, Walmart can anticipate a shopper's needs and promote deals as she moves around the store," said Richard Crone, a principal with Crone Consulting LLC.
Walmart's efforts also demonstrate the persistent and industrywide disagreement over which technologies to use for mobile payments. The mobile wallets that come installed on consumers' handsets — Apple Pay, Android Pay and Samsung Pay — all rely heavily on NFC technology, as do some of the newer bank-branded wallet apps. Retailer apps, by contrast, tend to use bar codes and QR codes, sometimes in combination with geolocation and Bluetooth to properly locate the shopper.
"The payments landscape is fractured and splintered, with no uniformity of approach from one retailer to another," said Lars Holmquist, a payments industry veteran who is now senior vice president of group business development for global consulting firm Collinson Group, which specializes in consumer behavior.
The Consumer Factor
Because variety and competition are the lifeblood of retail and services, it's no surprise there's little uniformity in stores. But the challenge for retailers is finding what works best for their business models and for their customers, who are the ultimate decision-makers of which payment methods they prefer at the point of sale.
Despite the perception that consumers resist change, they in fact are eager to embrace mobile payments, given the right product at the right time, argues Collinson Group's Lars Holmquist.
The rare success stories include Starbucks, which provides a simple bar code-based app that links to its immensely popular gift card and loyalty program. Its mobile payment app launched in 2009 in just a handful of stores, and the company quickly pushed to make it available nationwide. As of July 2015, Starbucks hit the milestone of accepting one in five payments in U.S. stores through its mobile app.
"Our research suggests 63% of consumers actually are ready to use mobile payments because they're faster, more personalized and more secure," Holmquist said. "But we have to give consumers a reason to want to change their behavior and embrace mobile payments, and so far they haven't seen it."