Mobile payment applications may seem cool at first glance. But at least one industry expert isn’t quite yet convinced.
Dr. Fumiko Hayashi is a Senior Economist in the Payments System function of the Economic Research Department at the Federal Reserve Bank of Kansas City. Earlier this year, she wrote a paper with an inquisitive title that suggests there’s something yet to prove for players in mobile: “Mobile Payments: What’s in It for Consumers?”
Hayashi says several issues will continue to prevent mobile payments from taking off in the U.S. in the short term. One is circular: because businesses don’t know what mobile payment standard consumers will use, they’re not adopting — reducing consumers’ incentive to adopt, and so on and so forth. In other words: a classic chicken-and-egg conundrum.
Hayashi also argues that U.S. consumers are yet to be given access to a “killer app” — something that solves a major problem, like transit payments in Tokyo or cash access in Africa. Without that killer app, adoption could be slow.
Below find the entire Q&A exchange between Dr. Hayashi and PYMNTS.com. And let us know what you think of her stance in the comments.
PYMNTS.com: Does mobile payment adoption in the U.S., in your view, match the hype and attention the payment niche has received?
Dr. Fumiko Hayashi: No, net yet. But that might change as mobile applications become available at several relatively large establishments. At Starbucks, customers can pay with their mobile phone using Starbucks’ mobile phone application. PayPal’s mobile application now can be used at all Home Depot locations. Some transit authorities, such as those in Chicago and Utah, announced that they would start accepting mobile payments. Once consumers are exposed to those new mobile payments and if their experiences are positive or they get positive perception from seeing other people using mobile payment applications, then that will facilitate mobile payment adoption by consumers as well as merchants.
PY: To the extent that adoption has been limited, do you think supply side or demand side barriers have been more preventative?
FH: Both supply side and demand side barriers are difficult to overcome. Some of the barriers on the two sides are closely related. For example, agreeing on which mobile technology standards to adopt is a supply side barrier, but it significantly affects the main demand side barrier – uncertainty about the benefits of mobile payments to consumers. Some of the important mobile payment attributes, such as convenience, speed, and security, depend on the technology standards. Because of the lack of clear direction about these standards, consumers may not know what they can expect from mobile payments. Suppliers of mobile payments, on the other hand, may want to determine which technology to adopt after knowing consumers preferences or needs. But it may be difficult for consumers to express their wants or needs without knowing what mobile payments are capable of. It is really a chicken-and-egg problem.
Other barriers are specific to the one side or the other. A supply side barrier, for example, is how to divide revenues among various parties in the mobile supply chain. Payment supply chains are usually very complex but the mobile payment supply chain is even more complex. So, it may take time to agree on a business model, unless there is a strong leading entity. One of consumer side barriers is inertia – it takes time for consumers to change their payment habits. If we look at consumer adoption of new payment methods, say debit cards, it took time and adoption rates varied significantly by generation, especially in the earlier days of debit cards. For most new payment methods, younger generations tend to adopt those relatively quickly. We may see the same pattern for mobile payment adoption.
PY: Are mobile payments too similar to traditional payment options to merit a rapid transition? What are mobile payments’ strengths that could push adoption forward?
FH: It is difficult to find “killer apps” in the U.S. In other countries where mobile payments are more popular, there are killer apps that have resolved pain points for consumers. For example, mass transit in Tokyo was a pain point for many consumers. But thanks to mobile payments and contactless cards, people are able to go through the gates at train stations more quickly and smoothly. Mobile payments in Africa address a different pain point – consumers lacked access to noncash forms of payments before mobile payments. Compared with these countries, the U.S. payments system works well and pain points for consumers are relatively minor. This may impede a rapid transition to mobile payments in the U.S.
However, I think mobile payments’ benefits do exist. For example, two-way communication is superior to current payment methods. No traditional payment methods allow two-way communication at least at POS (payments over the Internet allow some communications). The communication can be used in a variety of ways: Monitoring account balances in real time – this will allow consumers to make better payment choices and better financial decisions; security – consumers will be able to receive fraud alerts, mobile technology (e.g., geolocation) will allow for quicker detection of a fraudulent transaction and prevent further fraudulent transactions, or communication can be used to authenticate the consumer or his/her payment method; integration of the shopping experience and payments – this includes price comparison, receiving coupons/discounts from merchants and using those with payment methods. There are many other possibilities.
For some merchants, mobile devices are a powerful tool to accept payment methods as well. There are several applications that help small merchants who had difficulty in accepting payment cards before. Or mobile devices provide mobility to POS devices (such as at Apple stores and Nordstroms). Most of these applications for merchants work as card acceptance devices, but in the future payments may become mobile-to-mobile (such as Pay with Square).
Such mobile-to-mobile applications could be used for person-to-person (or peer-to-peer) payments as well. Currently, many person-to-person payments are made with paper-based methods, such as cash and checks.
I think mobile payments have a lot of potential.
PY: Which technologies, companies, devices have the most influence on the future of mobile payments in the U.S.?
FH: This is a difficult question. A few years ago, the consensus seemed to be NFC – many people in the industry said that NFC is the most viable technology for mobile payments. But as mobile payment applications that do not use NFC technology, such as Starbucks’ 2D barcode and PayPal’s mobile application at Home Depot, were introduced in a major way (beyond pilot programs), some people may have had second thoughts about NFC.
But I think multiple technologies co-existing for major POS transactions may delay mobile payment adoption. For one, merchants may not want to spend money on different devices in order to accept all different mobile payment technologies. Then, for two, consumers may not adopt mobile payments that have limited usability. So, it would be better off for end users on both the paying and the receiving sides to have one technology standard (or compatible technologies) that can be accepted as widely as possible.
PY: Overall, what’s your assessment of the mobile payment environment in the U.S., and how do you expect that environment to change over the next year?
FH: As I mentioned, a rapid transition is unlikely to occur in the U.S. If we look at EMV migration that is currently underway, we can see how difficult it is to coordinate industry participants to move to a different security standard. Visa, MasterCard, and Discover have different approaches to EMV. There is uncertainty in the implementation of EMV by other PIN debit card networks. And card issuers and merchants are not sure about what to do now. It is difficult to imagine that mobile payment adoption will be any less complicated.
One development that might accelerate the transition is that more public entities, such as the Fed, FTC, CFPB, FDIC, and Congress, are interested in mobile payments. It is possible that one or more of these entities could play a facilitator role, coordinating with industry to set technology/security standards and to clarify consumer protections and privacy rights. That might address some of the barriers to adoption quicker than private industry alone.
Fumiko Hayashi
Senior Economist, Federal Reserve Bank of Kansas City
Fumiko Hayashi is a Senior Economist in the Payments System function of the Economic Research Department at the Federal Reserve Bank of Kansas City. Since joining the Federal Reserve in 2001, Ms. Hayashi has specialized in the economics of payments-related markets, such as ATM, debit card and credit card markets. Her current projects include research on consumer payment choices and on the economic and public policy implications of recent changes in the ATM and debit card industry.
Prior to joining the Federal Reserve Bank of Kansas City, Ms. Hayashi conducted research examining consumer savings and long-term care insurance, social security reform in Japan and nursing home markets in the United States. Her research has been published in academic journals such as the Quarterly of Social Security Research (Japan), the Economic Review (Japan) and JCER Economic Journal (Japan). She received a bachelor’s degree and master’s degree in economics from Hitotsubashi University and a Ph.D. in economics from the University of Minnesota.
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