Is the Physical Wallet the Death of Mobile Payments?

The real reason mobile payments haven’t taken off is that they haven’t offered anyone a compelling reason to replace cash or cards, says Nick Holland.

Around 15 years ago, I wrote a thesis on the potential for mobile payments using radio-frequency ID technologies, such as Bluetooth and the recently announced near-field communication technology.

In the decade-and-a-half since then, we’ve seen massive changes in the personal-technology landscape. State-of-the-art cell phones back in 2000 had cutting-edge features like interchangeable face plates. In 2015, smart phones have features like “all of the information ever available to humanity.” We’ve seen mobile phones displace cameras, MP3 players, and books as the means for capturing and consuming media.

With such a clear pattern of displacement of analog by digital, one would expect that something as antiquated as cash would have gone the way of the dodo. Clearly not the case.

Balkanization

There’s a strangely disproportionate response to mobile by the payments industry. Traditional players are beside themselves with excitement and/or terror about the potential for mobile payments, and yet the actual volume of transactions is less than cards, cash, or even checks at the point of sale. Some companies are giving away money to encourage adoption, but still there is a persistent failure to ignite the blue touch paper and see the fireworks.

Certainly, the fragmentation of the mobile-payments landscape isn’t helping adoption. One of the fundamental requirements for a payment system to work is ubiquity of acceptance locations. It would be in the interest of all the mobile-payment providers to work on interoperability and consumer education. However, we are in the midst of a land grab, so marketing outguns logic as players push to promote their specific brand.

This would be less of an issue if it was a simple split by mobile operating system, since between them Apple and Android essentially provide the needed ubiquity. But the water is getting muddied by other electronics vendors (Samsung, LG), retail consortia (MCX), and now financial institutions (Chase Pay). Coming soon is Walmart Pay.

I can somewhat understand Samsung Pay, not because I think the brand has any affinity, but because the technology is retro-compatible with ye olde magnetic-stripe readers. LG Pay, which has yet to launch in the United States but could, has probably about as much chance of success as Imodium Pay.

And then there’s Chase Pay, which has thrown an extra level of complexity into the fray and may have encouraged other major financial institutions to brand their own mobile wallets.

There’s research out there that points to consumers preferring mobile-payment services from their primary FI over the likes of Apple, Google, or MCX. This is understandable. It’s easy to overlook that while we fintech nerds are pretty tech-savvy, a large swath of the population probably still wants at least one foot to remain firmly with a trusted bank. I’ve no problem with this, but again the more entrants we have, the greater the opportunities for balkanization. Not what is needed right now.

Game of Trumps

But even this fragmentation isn’t the core issue. It’s that consumers just don’t see a significant enough value-add for them to switch. Breaking down the attributes that a payment requires for success, we have ubiquity, speed, cost, security, and value addition. Let’s compare mobile payments to credit/debit cards with a quick game of trumps:

1. Does mobile trump payment cards on ubiquity? Obviously, no. With EMV bringing with it NFC terminals, we can expect the addressable market for contactless to expand organically over the next few years, but this will be far from the majority of retail locations in the next five years.

2. Does mobile trump payment cards on speed? With EMV transactions taking anywhere from four to 15 seconds to authorize, and with Android Pay and Apple Pay now working at an OS level and requiring no app, yes, mobile payments can be faster. Of course, you have to tell people this.

3. Does mobile trump payment cards on cost? Neither form of payment costs the consumer anything, so it’s a tie. No real merchant advantage, either.

4. Does mobile trump payment cards on security? With biometric authentication and tokenization, mobile is well ahead of mag stripe and chip cards. But the question is, with consumers protected with zero liability for fraud on many cards, do they actually care about security, or is the perception of security good enough? I think the latter, combined with a healthy dose of “fraud happens to someone else,” meaning that the security angle for mobile is only going to win over the most paranoid of consumers. For merchants, again it’s a card transaction via mobile with the associated card interchange rates.

5. Does mobile trump payment cards on value addition? Now clearly, it should be able to do this, given the potential for connecting information behind the scenes. But thus far all we’ve got is a handful of loyalty cards connected to the digital wallet, which is kind of pathetic.

Of course, the trajectory here is for digital to displace analog, so it is only a matter of time before mobile payments take off. But the velocity of this takeoff depends on making payment with a phone a measurably better experience than alternatives.

I believe this will come from leveraging data acquired at the micro-transaction level to provide real-time offers and promotions based on behavioral history and location. That is potentially the special sauce that will incentivize consumers enough to drop old patterns of behavior.

Mobile payments really need to be assessed in the context of not just the transaction, but the entire retail experience, if there is to be catalytic growth. As they stand today, they are collectively replicating the experience of traditional mechanisms. Since it’s going to be some time before we can safely ditch our physical wallets, these will remain the default.

—Nick Holland is an independent payments consultant. Reach him at nickster2407@gmail.com.