Thinking of Mobile: My Opinion on an Academic Paper on Mobile Payments

Last week Mike Wilkinson sent me a link to an article of the Review of Network Economics. The article ‘Mobile Payments at the Retail Point of Sale in the United States: Prospects for Adoption’ is a study by some researchers from Boston on the chances for success of mobile payments in the US. Must say I really enjoyed reading this 29-page academic article. And I am happy to share my point of view on it in italic.

Summary of Document (and my view on the summary)

For the researchers mobile payments are defined as ‘the use of a mobile phone to make a payment at a physical retail location, whether or not the phone actually accesses the mobile network to make the payment’. This means the person-to-person (P2P) payments are more of less out of scope in the study.

I personally think this a rather narrow scope, since for me P2P would be a true added value of mobile compared to cards. So for me having a feature to make P2P payments in a bar, for example, could convince me to use it at a POS as well.

Their conclusion is that there is no evidence that in the near term these kinds of payments will be successful. They see many more pilots testing the model in the market, but they don’t expect mobile payments will become true competitors to cards in the next 1-3 years.

Note that this article was written in 2010. We are already one year further and I still don’t expect this to happen in the next 1-3 years. They may start rolling it out by then but the widespread success… I don’t think so honestly.

Their insight in the market makes them believe NFC will be the winner in the mobile payments technology area. They also noted that using contactless technology in a mobile device does not require the device to use the mobile network. In that case a connection with a computer could make the synchronization in order to make payments. The benefit according to the researchers is that this implies that payments can also be made where no mobile signal exists and when battery power is exhausted.

Although I doubt synchronization can be done when the mobile’s battery is down, I see a very different interesting opportunity here: thanks to this the bargaining power of the telcos in the traditional mobile payments business model gets eroded. If an alternative for the secured element in a SIM card can be found through f.e. a micro SD chip there will be a shift of bargaining power in the existing classic mobile business model. This was new for me as I thought SD cards could only store data (although Ainsley Ward had already been blogging about this). This offers 2 main benefits for payments:

–          SIM cards no longer need to be modified to add an additional secured element

–          The payment app can easily be transferred from mobile to mobile and is independent of the subscription

The challenge for telcos in the mobile payments game will be to focus on added value through innovations and linking several services into one service offering and I think there are real opportunities. A link with a subscription for easier uploading of a mobile account will, for example, still be more easily by telcos then other companies that try to enter the market. Telcos have an infrastructure of transferring low values from one account to the other and so they could even be better positioned for this than true financial institutions. A next step to a prepaid cards program could then easily be made for a more integrated model for the consumer for small and higher value payments through a mobile phone.

Benefits of Mobile Payments (and my view on the benefits)

The next part elaborates on the benefits of mobile, it will not be a surprise they come up with following elements:

–          They are fast (not much faster than contactless card payments I assume)

–          For micropayments, where no authorization is required, there is a real potential to digitalize these transactions

–          Mobile payments an be made more secure (I assume this is more a US point of view and it can be argued that with the recent push of Visa to move cards to EMV mobile would really still be more secure than cards in the future)

–          The mobile device has the possibility to carry many card accounts. The researchers believe this could increase the competitiveness since the switching costs lower, as no new card needs to be purchased to access the new card account

–          Evans and Schmalensee (2009) believe the real gains will come from what they call the ‘technological mash-up’ of telephony and payments, and they speculate about a market for advertisements delivered to a mobile phone based on a consumers location and buying habits

–          Mobile could also be used to store personal information such as the driver’s license, making it a ‘fully enabled digital wallet’.

I believe that the only sustainable technology launch in the coming 3 years will be the payments related stuff. The initial focus will indeed be micropayments, although I think a mobile today is smart enough to ask for a PIN when needed, and in that case the use of the mobile payments technology could be extended to become a perfect substitute for a card.

The technology mash-up sure sounds awesome, and it will definitely come, but I don’t expect a big rollout of this in the coming years already. Some pilots here and there will show the opportunities of this technology, but privacy legislation might become an issue in linking personalized consumer profiling with location-based advertisements on a mobile phone.

For storing personal information on a mobile phone there is a very strict security policy and technology needed. I suppose at this moment it is still unclear what the standard will be for these kind of implementations. At first sight the SIM card could bring this solution. But the problem is that if the customer changes its telco relationship he also gets another SIM card, so how will these data be transferred then? Also note that if a government would like to support this method as the only solution for driver’s licenses or ID card, this would mean EVERY telco must support this on its cell phones.

Demand Side Barriers (and my view on these barriers)

They then continue with the demand –side barriers:

–          Costs: high cost to consumers and merchants to upgrade to new technology. Mobile phones as well as POS terminals might need an upgrade or replacement and that is of course expensive

–          Substitutes: low benefits because of the existing payment system. Cards offer the same functionalities in fact than a mobile phone for making payments

–          Network effects and two sided markets. The success of a payment solution is entirely dependent of the scale on which it is used. This is where most discussion starts: who must be convinced: merchant or consumer? Consumers don’t use it when merchants don’t accept it and merchants don’t accept it when consumers don’t use it! The so called ‘killer app’ could overcome this, where they give the example of Japan rail system.

The believers in the mobile technology can play with the first element I would say. By subsidizing the upgrades for merchants and/or consumers the investment cost could definitely be reduced. The authors also mention the SD card with NFC antenna as an alternative for an NFC enabled handset. This way consumers can buy a cheaper phone and only need this SD card to make payments.

The network effect in this business is another critical factor. The authors give the example of rail road system to show a good acceptance network can more easily convince consumer of joining the club. I agree with this, however it is important to note that this is in a closed loop system and that is totally different then the open loop, where the scale is much harder to achieve.

Supply-Side Barriers (and my view on these barriers)

The main supply-side barriers according to the authors are:

–          Negotiation costs: there are many stakeholders with all their interest and opinions. In those circumstances a consensus takes time.

–          Appropriability or public good nature of industry standards: the problem is mobile payments needs standardization but no company is willing to work on it, since it requires more effort than internal benefits. From the moment a standard is set new competitors would be ready to enter the market.

–          Lack of clear regulatory oversight and regulations: this is probably especially the case in the US where several governmental organizations have some kind of responsibility in the financial services sector, at Federal AND on state level.

–          Business model: the key elements here are according to the article customer ownership and price setting

I believe indeed all these arguments are very relevant. In the article they refer to the card-based system that offers more or less the same speed, convenience and acceptable security. This means for mobile in the short run they will need to find other arguments to convince consumers. That is currently the hard part. Most parties are convinces of the long term advantages, however they do not seem to find the true added value to shake consumers’ minds.

Concluding Recommendations (and my concluding remarks)

They listed following policy recommendation to make mobile payments work in the future:

–          Conduct quantitative research, including survey and market research, to estimate the potential value of mobile payments in the United States

–          Help to establish regulatory guidelines for security and privacy and to clarify oversight responsibilities

–          Facilitate coordination of industry-wide standards that ensure the continued safety, soundness and efficiency of the payments system by establishing a neutral setting where all the stakeholders can exchange ideas without concerns about collusion

Do I see a need of a performing American Payment Council here, such as the EU has been setting up? I think this will definitely help to get some standards established; however I think this will only be successful over the medium to long term (could be a prejudice based on the European example as well).

I assume the market surveys have been made already in the past by many different organizations, and they probably all have interesting insights in what the market is like. A better coordination between all these impacted organizations could definitely help to scale the market better. I also agree that a better insight in the different technical and organizational possibilities will facilitate a ‘best fit for all’. Just like in the cards game I assume at the end a couple of big players will remain and they will become the standard. Smaller players will try to break through via new solutions, or cheaper unit costs for customers (merchants and/or consumers), maybe even a new back solution (like direct debit instead of a card scheme for example.

For more information, again I recommend you to read the document, via this link.


5 Comments Add yours

  1. Mike Wilkinson says:

    Thanks for all your thoughts, Rik. I do not agree that Americans need a Payment Council. You mentioned a technology mash-up between telephony and payments. Creating some sort of Payment Council might decrease the extent of any sort of “mash-up”: there might well be much less competition between standards. I agree that standards are an important question, but I’m by no means convinced that standard setting is the answer. For similar reasons, I believe the lack of clear regulatory and regulation is in fact an advantage of the US market, not a barrier.

    On P2P payments, I agree that this was something of a narrow scope, although I see a payment instrument offering these as more difficult to develop. I believe that because I see significant network effects existing on both sides of the two-sided platform (because consumers are present on both sides), where as they’re more relevant to just one side for POS payments (because merchants partially internalise the benefits of an instrument for consumers).

    Finally, I see significant development of mobile payments in the US as at least 5-10 years away, subject to two qualifications. Those qualifications are that public transport operators start developing contactless ticketing systems that can also be used for other types of transactions and that no one makes a rigorous effort to set significant standards in the industry.

  2. Mike, I understand the authors of this paper when on their idea of standardisation and regulation: banks (and many consumers) are simply not willing to use a payment instrument if it has no proven track record (in line with regulation). Also, if there is a standard different players can build other competing instruments by using this standard, without the insecurity that is will be forbidden or ignored later when a new standard comes up.
    Right new banks and other players are simply waiting who will win the game at the end. Several players still needs to be phased out of the market before we can see who might win tthe game.

    Concerning your public transport idea: I am still not convinced that they are better positioned to launch this then for example a bank in combination with MasterCard PayPass. Future example will show us who’s right I guess…

  3. Mike Wilkinson says:

    Thanks, Rik. Since they can’t have had a “proven track record” when they first got going, how on earth did credit and debit cards take off? I think a better argument, and one that also has support in the academic literature, is that it’s difficult for consumers to try a new payment instrument. Most will watch how there friends and family are paying for stuff and just copy that. I reckon proven track records only relate to what friends and family are doing, not to an external factor like regulation.

    As for contactless without public transport, your challenge is to name one system anywhere in the developed world that functions successfully without such an application. Just one system, that’s not asking much, right? 🙂


  4. One system? You mean a card reader then? Well, in BE Atos Worldline has a dominant position with most of a card readers coming from them. They decided to upgrade the POS terminal to be able to accept contactless PayPass (Maestro). This is not succesful yet, since it didn’t start yet.

    We’ll see how that works in the future…

  5. Mike Wilkinson says:

    Sorry Rik. When I said it had to function successfully, I meant it had to have significant numbers of merchants accepting it and of consumers wishing to use it and I meant at the present time. Although these criteria are more restrictive, I’m only keen to hear of one system. If you are able to find one, I think it’ll be as much interest to me as it will you. 🙂

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