The Fed issued its update recently on the state of the mobile U.S. landscape two years after its Mobile Payments Industry Workgroup (MPIW) convened to provide guidance on how to move the mobile industry forward. I have read the report several times and so wanted to share my thoughts on their assessment of the industry’s evolution two years since they published their first report and the implications of that evolution to their mandate.
Observation Number One | Based on the MPIW’s definition of a digital wallet, we should bag the whole idea and just stick with using the cash that’s in our leather wallets.
Ok, maybe that is a slight exaggeration, but by the time a digital wallet is released that meets the workgroup’s definition, we all might all be networking at that big mobile commerce conference in the sky. Here is how they define a mobile/digital wallet:
“A true digital wallet is expected to be open and ubiquitous, accepted at most merchant locations, and across a multiplicity of different payment terminals. It should allow compete access by all consumers for various services, including transit, vending and ATMs.”
Based on this definition, the only payment method that meets this definition is cash in our leather wallets. Okay, so I am being a little fresh but their definition sort of makes it hard to see how anything that is in the market now or being tried makes the cut. Now, if I were being cynical (who me?) I would say that the definition was written to stack the deck toward NFC given its parenthetical referencing transit (the only place where NFC has ignited) and vending (one of the only places ISIS is accepted) — but that may be just me.
But, I think this really does raise an interesting point – what is a digital wallet? Is it a container for payments and things related to payments/commerce like offers and coupons – or does it include things that are in your leather wallet today like ID and pictures and even digitized cash? I got into an interesting discussion a couple of weeks ago on this topic with someone else in the industry – and I think we ended up agreeing to disagree. I don’t think that we’ve yet seen the digital wallet concept that will get merchants and consumers excited about adopting it – but many are experimenting with concepts that are getting us close – and there are lots of payment-enabled apps that are getting traction in particular merchant segments too that pull payments thru while solving another problem for them. I happen to think that the further we move away from thinking that we have to replicate our physical wallets on line and the closer we move to using the mobile device to reinvent the shopping experience in new ways, the more likely it is we will see a digital wallet vision materialize that all stakeholders can wrap their arms around relatively soon. I’ll be sharing some of my thoughts on that in a future piece. Anyway, at the end of the day here is the best definition of a digital wallet: a digital wallet is whatever consumers want it to be. They’ll ultimately decide, and me, the Fed and Uncle Bob will just defer to them.
Observation Number Two | EMV won’t ignite mobile payments.
Two years ago, the Fed, along with a lot of very smart people, was convinced that NFC was the future of mobile payments, and wrote that by 2013, most terminals would be NFC-enabled – thus providing the catalyst for mobile payments. That has not happened, although the Fed does believe that NFC technologies provide the most secure transacting experience for consumers, and the technology standard that will assure a consistent experience across merchants. The report states that EMV is an important technology in creating a secure NFC mobile experience since it leverages the same technology standard to authenticate data and that the US is the only developed nation not to sign on. I agree with the Fed’s assessment that merchants view EMV and NFC as two distinct POS implementation decisions, and that implementing EMV doesn’t necessarily imply that merchants will implement NFC. But since I don’t think that merchants will invest in a two-decades old technology at the point of sale that doesn’t solve a problem that they have at the point of sale today, and so I don’t think EMV will ignite mobile payments in the US. The liability shift doesn’t seem to phase them either – large merchants are going on record stating that even after paying for fraud liability, they still come out better than if they had implemented EMV. So, I think instead we will see cloud-based technologies trump EMV in igniting mobile payments and I have been introduced to two stealthy use cases in the last several weeks that could make this whole area very interesting very quickly. And, isn’t it sort of the ironies of all ironies that MCX decided against an NFC standard for their mobile payments system, in spite of the fact that it is being led by Walmart that has adopted EMV technology at the POS?
Observation Number Three | Mobile commerce needs a business case to ignite.
The Fed’s report concluded that one of the reasons that mobile has been slow to ignite is the lack of a business case. I absolutely agree. Two years ago though, the business case was all sort of balled up with the push/pressure for merchants to install NFC at the point of sale to accept mobile payments and that was a tough sell for all of the obvious reasons. That notwithstanding, the move to mobile – or anything new – always requires a clear understanding of the ROI of that change and that means a business case is an important organizational to-do. It is now abundantly clear that mobile can unlock the opportunities the lie at the intersection of on- and off-line commerce and those are the opportunities that can be monetized in new and different ways. Sometimes that monetization will arise from using the mobile to incorporate new features and functions into the customer experience that, in turn, creates preference and greater spend from existing customers. As a merchant recently said to me, customers aren’t flocking into stores asking for a digital wallet, they’re asking for easier ways to access the things that make their relationships with that particular merchant easier to manage. And, those things aren’t dependent upon a payment technology but rather the ability to access their own customer data about purchasing behaviors, to then know when that consumers enters their store and then to mash up and serve data to a customer that is relevant to their shopping experience and are not intrusive. Again, ultimately consumers are going to tell us which of the myriad of solutions that entrepreneurs put forward tickle their fancy and don’t creep them out.
What was also mentioned in the Fed report is the need to rethink the “card present/card not present” fee schedules for mobile when used in the physical storefront. I also agree. Since the mobile device offers something even better than having a card present – having a person present that unlocks the payment transaction utility in the store somehow – it seems that the distinction (and higher fees associated with that distinction) be revised to reflect the enhanced security and authentication that mobile devices are able to provide.
Observation Number Four | Innovators aren’t the ant at the mobile commerce picnic.
The Fed report states that participation by new entrants, large and small, generates new risks to the ecosystem and new opportunities. The MPIW workgroup concluded, properly, two years ago that there wasn’t the need for additional regulation since there were loads of regulations in place already and that, instead, what was needed was more of a sharing of information among existing regulators in an effort to make regulatory requirements across regulators more consistent. The update stopped short of expressing the need for more regulation today but did raise a number of issues about third party players (aka non banks) and concerns over data privacy and security and suggested the need to continue to monitor the area to determine when new regulation would be needed.
My take is that between the mobile industry, payments and banking, there are dozens and dozens of regulators and regulations, including the CFPB, that preside over the operating practices of the various players across the ecosystem. The tricky part here really lies in the temptation to regulate the unnamed “non banks” who operate in this space, namely PayPal, LevelUp, and Square, who are all getting traction with their various mobile commerce schemes and who run the risk of being targeted by regulators once they really get a head of steam. One of the fastest ways to kill mobile commerce is to punish the success of innovators by regulating them to death, especially since we are just getting started and we have no idea how things will look once we do settle on a standard for how mobile commerce is deployed. Let’s wait to see what “it” is before springing into regulatory-action mode.
If we need a data point on this, look at developing countries and the lack of success in igniting mobile payments. The biggest impediment to igniting mobile commerce in developing countries has been the requirement that service providers have a banking license – which take years and lots of money to get and then imposes massive restrictions on what you can do once you get it. M-Pesa in Kenya – the only real success story of note in the developing countries – only ignited because that particular regulatory requirement was relaxed and Safaricom was allowed to have a bank operating in the background instead of being a bank itself. From conversations I’ve had with experts in this area who have tracked efforts to develop mobile payments systems in other parts of Africa and in other developing countries, any place that has required mobile money transfer entities to subject themselves to banking regulators have brought mobile payments development to a slow crawl.
That said, part of the responsibility will rest with the need for all service providers to be clear with their customers. Consumers’ fears today are reported to stem with not understanding how data moves from their phone to a POS terminal. NFC made them wary because of the fear (irrational or not) that someone could hack the transmission between phone and POS. Consumers don’t think twice though about shopping on line via their phones – to them it is just another eCommerce channel – which it is! Consumers using LevelUp and PayPal don’t seem concerned that much either, since both require a PIN and in the case of PayPal, they’ve spent 14 years convincing consumers they are the safe alternative to shopping online. So much of what mobile commerce is today is a consumer opt-in world and consumers, by and large, do understand what that means.
Observation Number Five | Mobile commerce needs open access to scale
The workgroup points out that mobile commerce has not moved as fast in the last two years as it needed to, and they are right. But that is only because they and everyone put all of their eggs in the NFC basket. Their conclusion is that open access is needed to scale and that a standard that is compatible across all merchants domestic and global is required for success. What I read into this statement is that they still have fingers crossed for an NFC mobile commerce world (even though I am not entirely clear on what mobile open access means in this context).
I truly believe that the Fed and this workgroup want to help ignite mobile commerce. But, I think that rather than focus its efforts on designing a standard, it ought to step back and let the market decide how mobile gets ignited. There’s nothing wrong with efforts to highlight issues that are getting in the way of innovation but to try to design a standard when we are just beginning to see how mobile interacts in consumer and merchant environments seems a bit premature. 2013 is the first year that we are seeing mobile trials and experiments in the field and real data points on what consumers and merchants like and don’t like. Let’s give the innovators wide berth, and let the mobile commerce chips fall where they may, and let the consumer decide what they want. If we did that, maybe two years from now, we’d be a little closer to a standard that will drive our mobile commerce future forward.
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