Getting things moving

By Illieva Ageenko

Does the solution to unleashing the potential of mobile payments lie in developing a new infrastructure or in the integration of distributed components of the mobile ecosystem?

“In several areas of the world, the mobile device has become not just the preferred method of communication, but also a major medium for conducting commerce and making payments for goods and services”
-Ilieva Ageenko

The more than four billion mobile handsets in use around the world represent not only a technological change, but also a social revolution in the way they are changing how billions of people communicate and interact. In several areas of the world, the mobile device has become not just the preferred method of communication, but also a major medium for conducting commerce and making payments for goods and services. To this point, however, mobile innovation has largely been driven by countries like Japan and India, and the US consumer market has not yet embraced this new model beyond the 'test-and-trial' stage.

One reason why America has been lagging is that, unlike many other markets where mobile payment deployments led the way to the widespread adoption of the mobile financial channel, in the US the introduction of mobile financial services started with banks focusing their mobile banking efforts on their existing online customers. While the idea is to tap into the already savvy internet customer base as the initial adopters of mobile services, hinging the adoption of mobile financial services to internet banking penetration has become one of the limiting factors for a widespread adoption of mobile banking and could influence the way mobile payment services will be developed and deployed in the market.

A second, and perhaps more significant, reason for the delay has been the complexity of the overall mobile payments landscape. No other country in the world has as many telecommunications companies, banks/payments processors, and other players (like PayPal Mobile, which mitigates some of the demand for such services) as the United States. The sheer number of entities involved makes it difficult to develop the same sort of concerted effort as has happened in some other countries where the 'mobile ecosystem' is less chaotic.

Moreover, the lack of uniformity across the different carriers, platforms, and devices makes a standard solution exceedingly difficult to create. Not only does the solution have to work on the numerous different makes and models of cellular devices, it also has to be supported by the various telecommunication networks. A solution that works on a Nokia might not work on a BlackBerry, and a payment system supported by AT&T might not be supported by Verizon. The difficulty of developing a standardized payment solution has played a large part in why many of the mobile banking attempts have failed to make it out of the trial stages.

However, recent technological advancements have nullified many of the previous stumbling blocks for mobile payments. The emergence of the smartphone into the mainstream has revitalized the prospect of mobile payments. Apple's immensely popular iPhone, for example, offers an easy-to-use payment mechanism by allowing users to purchase songs, applications (apps), and other media directly from iTunes with the click of a button. The formula seems to work, as sales from the iTunes store are already nearing $1 billion per quarter, and are expected to continue to rise significantly.

Apple has managed to succeed where others have failed by offering relatively low-cost products via a channel that many users are familiar and comfortable with (iTunes). The broader effect of the success of Apple's mobile efforts has been a shift in the way customers view mobile payments. According to a recent survey done by Harris Interactive, more than 45 percent of respondents were 'very comfortable' with mobile transactions - a dramatic change from 2007, when 65 percent of users reported being 'very concerned' with the safety and security of the platform.

Google's Android mobile operating system is another substantial development in mobile technology. As the number of Android handsets continues to grow exponentially, it promises to provide much-needed standardization to the numerous mobile manufacturers. Instead of creating a new infrastructure and hence another silo in the payment industry, Google's Android (along with Apple and the iPhone/iTunes) is tapping into the existing payment distribution models and targeting the customer base of Google Checkout.

Amazon and Paypal are also offering solutions designed around leveraging their significant online payment presence. In addition to its current iPhone application, Amazon announced an expansion of its mobile payments offering with new applications as well as mobile compatibility for broader array of supported websites. Paypal is offering its own mobile application, called PayPalX, which is compatible with the companies' 45,000 online merchants. Both e-retailers are focused on allowing users to purchase goods through their existing memberships with a few very simple steps, similar to Apple's process with iTunes.

In addition to the tech giants, e-retailers, and swarms of mobile payment startups, we're also beginning to see big players from other industries stepping into the ring and developing partnerships. Visa has teamed up with Google and Nokia to allow Android users as well as those with a Nokia 6112 handset to access funds and transfer them to a recipients account. T-Mobile has been working hard to integrate Android into customers billing before the holidays, allowing purchases made through the phone to be added to the carrier's monthly statement.

There has also been activity from American companies in other countries, representing at least a greater attentiveness to the emerging mobile payments industry by domestic players. Mastercard just announced a partnership with RIM and the Bank of Montreal to allow contactless point-of-sale payments from chips stored on the back of certain Blackberry devices. American Express also recently unveiled a partnership with the Chinese bank ICBC and leading mobile payments provider for the region, UMPay. According to the press release, the deal would allow cardholders to link their accounts to their telephone number, select merchants accepting mobile payments from their mobile phone, and authorize their payments on the spot. In the same way that Paypal and Amazon are leveraging their online presence with regard to mobile payments, Mastercard and Visa seem to be capitalizing on their broad credit card infrastructure to allow mobile payments at traditional 'brick and mortar' merchants.

For the most part, major US banks remain on the outside looking in. One might wonder how long this will be the case, however, considering the expected growth and revenue opportunities within the channel. Apple, Amazon, and Paypal's mobile payment services all come with fees ranging from 30 percent (for Apple) to 0.75 percent (for the least expensive of PayPal's services). Celent predicts that the mobile payments market could reach up to $5 billion in revenue in the States alone.

Banks not only have a pure financial incentive to get involved, but a demographic one as well. The emergence of Generation Y into the workforce is likely to also substantially impact banks mobile strategy, particularly since recent surveys have suggested that as much as 40 percent of this demographic will choose their bank based upon the mobile financial services offered. This is the generation that grew up with mobile devices, and the bank that offers cutting edge services and convenience will likely reap the benefits of attracting this age group.

As traditionally happens with new technologies, there are still plenty of questions left unanswered. Will the key to mobile payments be streamlining the online experience, or enabling convenient point-of-sale purchases? Will banks' vision for a mobile wallet remain a distant vision, or an approaching reality? Will third parties find a way to replace the traditional payment model, or will it simply be a matter of streamlining what currently exists? The answers to these and many other questions will shape the way mobile payments impacts the status quo in the coming months and years, but one thing remains certain: when it comes to the convergence of trends and technology, it pays to think ahead.

Ilieva Ageenko is SVP, eCommerce Channel Executive at Bank of America.