Mobile Payments: Market Disruption in the Making? Or Flavor of the Month?

Slalom Consultant Jeff Barber

Jeff Barber is a Seattle-based leader in Slalom Consulting’s mobility solutions practice. He's a mobile technology expert with deep experience helping clients “operationalize” mobile technologies.

The topic of mobile payments is trending in the blogosphere. Every day you can read new announcements about the latest partnership, acquisition, or technology innovation that promises to revolutionize how consumers buy and how businesses collect money. How do you discern the real, emerging trends amidst the show and hype of the mobile media’s latest darling?

If you study the evolution of mobile payments from a global perspective, I believe you will see that:

  1. The market is transitioning into a disruptive technology cycle;
  2. The global consumer will lead the way in this new cycle; and
  3. A wake-up call is coming to traditional businesses.

Smartphone and tablet adoption will drive the U.S. market. The emerging market consumer will drive the international markets.

Market disruption

The stage is set for a classic disruptive technology cycle, as mobile technology innovation, social media, and emerging economic forces converge to create a perfect storm of global consumer behavior changes that favor mobile devices over traditional payment methods.

The biggest players in finance, e-commerce, and retail see the writing on the wall. Let the partnerships and acquisitions begin. Here’s a partial list of the 21st-century commerce leaders who have announced their forays into the mobile payments arena (visit me on Twitter for the stories):

  • American Express’s Serve
  • Best Buy–Exclusive launch of the first NFC-enabled Google Nexus smartphone
  • clearXchange–JPMorgan Chase & Co., Wells Fargo & Co., and Bank of America Corp. join forces to develop a mobile payments platform
  • Discover’s Money Messenger
  • Google Wallet
  • ISIS mobile wallet–AT&T Mobility, T-Mobile USA, and Verizon Wireless are building a nationwide mobile commerce network utilizing smartphone and near-field communication (NFC) technology
  • PayPal Mobile Payment Services
  • Square–Twitter co-founder launches mobile payment ecosystem

In the U.S., adoption of mobile payments is arguably in its very early stages, with just-in-time purchases being the key drivers on smartphones. Three great examples of JIT mobile purchasing done right are the PriceLine Negotiator, Starbucks Mobile, and Fandango apps.

The unanticipated wildcard in this mix is the tablet factor. Tablets have quickly become the fourth screen, enabling living room browsing and purchasing as well as interaction with connected TVs and computers. For example, Joe Megibow, VP–Mobile and E-Commerce Optimization with Expedia, shared these insights at the recent Mobile Breakfast Series – Mobile Commerce and Payments:

  • For Expedia, the majority of the mobile traffic mes from iPhone, roughly 60-70%, Android is around 25%.
  • iPad traffic is double the iPhone traffic though the device penetration is 1/10th. Conversion rates are much higher.
  • Two years ago, the mobile traffic was around 2% when Expedia didn’t have a mobile site. Now it is almost 6% with 10% on Saturdays, average transaction ranges in the $200-300 range.
  • Given the traffic dynamics on iPad, it is a new category in terms of consumer behavior.

It’s this kind of rapid change in consumer behavior that disrupts markets. Implementing these changes in the U.S. on a broad scale, however, does introduce challenges:

  • Brick-and-mortar retailers have sunk costs in existing payment systems. With soft sales due to economic conditions, they may resist investing in systems upgrades until they have compelling evidence they are losing business as a result of not accepting mobile payments.
  • There are significant and easy to underestimate technical complexities to implement these kinds of large-scale payment systems integrations.
  • Regulatory challenges may slow down adoption. For example, planned revisions to Federal Reserve’s Regulation E will include consumer protections for mobile payments. With debit charges surpassing credit charges, and more stringent rules for debit transactions, the regulatory decisions could result in mobile payments being accessible only to those who qualify for credit cards, or via carrier billing.

This is why many industry pundits are predicting it will take three to four years for mobile payments to go mainstream in the U.S.

The global consumer

Historically, Asian and European markets led the consumer adoption trends for mobile technologies. Mobile payments have been around for more than a decade in these mature economies and today represent a multi-billion dollar business. Wi-Fi also plays a more important part in the mobile payment ecosystem; for exampled, 50% of the data traffic in Europe runs over Wi-Fi.

The more interesting action, however, can be found in emerging economies. In addition to the BRICSA countries, even frontier countries such as Afghanistan, Ghana, Haiti, Rwanda, Tanzania, Uganda, and Afghanistan are now using mobile-money platforms. Innovative new business models in these countries provide their populations with an opportunity to skip the brick-and-mortar world and the 20th-century Internet e-commerce model altogether and go directly to m-commerce.

Mobile money transfers are the killer app so far in many countries. Mobile banking and mobile purchases logically follow when money flows are enabled via mobile devices.

A case study of how rapidly these new business models can succeed has been demonstrated by SafariCom, a Kenya-based wireless provider whose M-Pesa and M-Kesho services give Kenyans who may have never had access to utilities or banking the ability to use voice, data, banking, and purchasing functions on a mobile device. This is market disruption:

  • 52 thousand people signed up for an M-Pesa account the first month after launched in April 2007.
  • Eight months later, at the end of 2007,1.3 million Kenyans used M-Pesa for money transfers.
  • By year end 2008, 5.1 million Kenyans were using M-Pesa.
  • Today, 14 million Kenyans, 36% of the population, have an SafariCom M-Pesa account. Kenyans transact the equivalent of US $3.3 billion through M-Pesa, 11% of Kenya’s GDP.

The success of M-Pesa and similar systems in other countries suggests that the global market conditions are right for the growth of mobile payments. Technologies such as Near Field Communication (NFC) should gain momentum in this kind of rapid growth environment.

A wake-up call

From a global perspective, a wake up call is coming to traditional businesses in mature economies. In mature economies, more and more non-techie users are demanding seamless information and transaction capabilities across devices. As social media and faster access to data drive smart mobile device adoption, e-commerce is giving way to m-commerce. The global consumer who may not have experienced e-commerce now has access to m-commerce. What does this mean to U.S. companies doing business internationally?

The U.S. tends to lag behind the rest the world in mobile technology adoption, and there are challenges to domestic growth. Our mature economy has huge sunk costs into existing infrastructure, multi-billion dollar business stuck in old paradigms, and merchant fragmentation into various payment systems.

From a technology perspective, multiple payment processing systems and in-house merchant systems create costly and difficult back-end IT complexities in a mobile payment implementation. For example, when undoing a transaction, how many different systems in-sequence have to update and reconcile to process a refund or charge-back? There are also challenges with the mobile wallet model; how do you aggregate multiple credit, debit, and loyalty cards, and how do you establish the business rules for which account pays for a transaction?

U.S. consumers are also fragmented, economically and generationally. For example, 30% of consumers pay cash for phone bill, and 25% have a credit card on file with the carrier. This suggests that carrier billing will be a key factor in the success of mobile payments domestically.

As the market disruption unfolds, here are a few key trends to consider over the next ten years:

  • Innovative mobile commerce business models—which are generally immature at this point in time—are ultimately the key to implementing economically viable mobile payment systems.
  • Companies that implement a consumer-friendly mobile payment ecosystem that incorporates the full spectrum of device capabilities, such as NFC, barcodes, and apps, and that work seamlessly across four screens, will win over the affluent consumer segments.
  • Carrier billing will be the key to widespread adoption for consumers who don’t have credit card and/or bank accounts.
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About Jeff Barber
Jeff is a senior Business Analyst and Product / Program Manager, a leader in Slalom Consulting's Mobility Solutions practice with deep experience helping clients “productize” new technologies.

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