Mobile payments: A solution in search of a problem?

There's been a lot of hype around mobile payments over the past year, but the No. 1 problem that the mobile payments market faces is adoption. Consumers simply don't see a reason to replace their cash or plastic with a phone.

And yet one company after another is clamoring to get into the market. Technology companies, such as Google and PayPal have thrown their hats into the ring along with wireless carriers, AT&T, Verizon Wireless, and T-Mobile. Banks, such as Barclays and Bank of America, have also announced plans for a digital wallet and mobile payments. And credit card companies have also announced solutions. Even merchants like Wal-Mart and Target want in on the action.

The benefits for these companies are easy enough to figure out. The concept of mobile payments fits nicely into Google's core advertising and local deals business. Wireless carriers were initially interested in mobile payments because they saw it as a potential revenue source. Merchants, such as Wal-Mart and Target, which announced plans earlier this summer to launch their own mobile payment system, view it as a way to avoid interchange fees that credit card companies charge them.

Financial institutions like banks may see a way to cut out the credit card middleman to reap a higher cut of the fees that are paid to terminate transactions. And credit card companies, like Visa and MasterCard, at the very least need to keep their hand in the mobile game to make sure they can protect their transactional business and in the future potentially drive higher volumes of transactions through smartphones.

And then there are the startups that seem to pop up almost daily. Companies such as Square and GoPago see big potential in upending the fee structures that exist today in payments. And they promise merchants and others in the value chain a more economical model.

Clearly, there are benefits for each of these companies interested in mobile payments. But what's not clear is how it will benefit consumers. And until consumers themselves see a benefit, they're unlikely to change their behavior.

"The market right now is not being driven by any specific or urgent consumer need," said Aditya Khurjekar, co-founder and program direction of the mobile payment conference Money2020. "Instead it's driven by businesses looking to benefit from new consumer experiences, that are yet unproven . Ultimately, any new experience will succeed only if it is solved by working together for the common customer, and the experience is 10 times better than the current one. And that's a tall order."

This may be why mobile payments, which has been kicked around by different companies for a little less than a decade, has not yet gained much traction. I wrote my first story about NFC-enabled mobile payments in 2006. Handset maker Nokia was working with wireless provider Cingular Wireless (now AT&T), Citigroup and MasterCard Worldwide to trial phones with embedded Near Field Communications technology that leveraged the Mastercard PayPass contactless payment system. The companies launched a pilot program in New York City, which allowed people to use their phones to pay for things like subway rides or sodas at Coca-Cola vending machines.

The concept sounded interesting. Instead of carrying a wallet filled with cash or credit cards, all you need is your mobile phone, a device you're likely not to leave home without anyway. And when I first saw the Nokia solution demonstrated, I thought it looked nifty.

But to be perfectly honest, it seemed more like a novelty than a necessity. Using a mobile phone to make an in-store payment is no easier than using a credit card. And so the Nokia/Cingular/Mastercard trial never went anywhere.

Fast forward to 2011 when Google made a big splash with its Google Wallet platform. For more than a year, the service, which is only available on one wireless operator and enabled only on a handful of devices, has seen lackluster adoption. And yet there has still been one announcement after another from companies of all stripes that also want to launch a mobile payment solution. Even the coffee chain Starbucks has gotten into the act.

Analysts say that an explosion in the mobile payments market is just around the corner. In a recent report from eMarketer, which looked at projections from a number of high-profile market research firms including Gartner and Juniper Research, the firm said that in 2012 the U.S. mobile payments market will be worth $640 million. And by 2016 the total transaction value of mobile payments in the U.S. will hit $62.24 billion. The user base is still relatively small, with only 7.9 million users in 2012. But usage should grow during the next few years to 48.1 million mobile payment users by 2016.

While these figures may account for only a small fraction of in-store transactions in the U.S., it's still enough to draw the attention of wireless operators, as well as credit card companies, banks, retailers, the Internet search and advertising giant Google, and potentially even Apple, the most valuable company in the world.

This week, a joint venture backed by three of the four largest wireless providers in the U.S., AT&T, Verizon Wireless and T-Mobile USA called Isis, will announce the launch of its long-awaited mobile payments solution in its first two markets.

But in order for even the most modest growth projections to come to fruition, these companies will have to solve the same fundamental problem that plagued mobile payments back in 2006 when I was writing about Nokia's NFC-enabled devices. They will have to give consumers a good reason to tap their phones or scan a code within a smartphone app, instead of pulling out their credit cards.

"As with many new technologies, initially the offer may not be as compelling as it needs to be to attract users," said Noah Elkin, principal analyst at eMarketer and author of the report on mobile payments. "Tapping a phone instead of swiping a credit card isn't that compelling. So the industry needs to come up with solutions that gives people a reason to use their phone instead of a plastic credit card."

But Elkin believes this will change over time. Much like the mobile Web in its earlier incarnation, it was not used by many wireless subscribers. And Elkin argues it takes time as the technology evolves.

"In the early days of the mobile Web, the devices and networks weren't up to the challenge," he said. "But in a short time-frame post iPhone, the market moved quickly to consolidate functions. And I think it's inevitable that the same thing will happen as technologies and approaches to the mobile wallet market are consolidated."

So what needs to happen in order for consumers to see the true benefits of using a phone to pay for stuff?

The experience needs to be better. Anuj Nayar, senior director, of global communications for PayPal wrote in a recent blog post that "consumers need to see the value in order to switch from what they do today. That value can't just be a different way to do pay. It has to be better."

He said it's time for the industry to take a step back and figure out the problem it's trying to solve. He said that this is what PayPal did back in the late 1990s when it first introduced its online digital wallet. Consumers needed a way to pay for things easily and securely on the Web. Today more than 113 million people have a PayPal digital wallet, which is used primarily for online shopping. PayPal's vision is that these consumers will extend that wallet to using it on their phones to pay for things on the mobile Web as well as in stores.

"We are on the brink of another game-changing revolution that will change shopping more in the next few years than the Internet changed retail because it will affect all our purchases," he said. "At PayPal we have had a digital wallet for 14 years, we are just updating it to let our customers shop wherever they want, not just online."

The digital wallet must truly replace your physical leather wallet. In order for people to fully adopt the idea of using their mobile phone or any other digital wallet as a replacement for their existing wallet, all the items that they carry in their physical wallet must be available in the digital wallet either on the phone they carry or in the cloud.

(PayPal would argue that it's much more scalable to have information stored in the cloud, in which case the phone itself may not even be necessary for a transaction to take place. Meanwhile, Isis still believes in storing all the credit card information on the phone itself. This is a debate that is likely to play out over the next year to 18 months. And it will be a topic for a future story.)

What this ultimately means is that a digital wallet must also include a digital version of your driver's license, medical insurance and drug benefits cards, loyalty cards, receipts and coupons. Some services, like Google Wallet, are already including the loyalty cards and coupons in their digital wallets. And eventually that may help spur adoption. But until all these items are in a digital wallet, people will still need to carry around a physical wallet. And if you still have to carry your actual wallet, what's the point of the digital wallet on your phone?

The payment hardware and technology, whatever it may be, has to be ubiquitous from the smartphones to the merchant equipment at the check-out. NFC -- the wireless technology that allows tap-and-go payments on a mobile phone -- is a great example of how a lack of deployment can stall adoption. The biggest problem with the NFC approach used by Google and Isis is the fact that smartphones must be equipped with NFC chips and the payment terminals at the merchants must also be NFC-enabled. Rollout of NFC handsets has been slow, with only a handful of devices embedded with the technology in the U.S. And it's also been slow at merchants.

Companies invested in NFC are betting that adoption will pick up. Forrester predicts that 100 million NFC devices will ship globally by the end of 2012, which should help lay the groundwork for the growth of mobile payments, eMarketer said in its report. And others have predicted that NFC phone shipments will reach 700 million by 2016.

But right now only 8 percent of merchants around the world are equipped with NFC equipment. That's expected to grow to 53 percent in 2017, according to Berg Insight. And there's expected to be 86 percent NFC penetration at the so-called "point-of-sale" in North America by 2017.

While NFC is one technology that is used for mobile payments, there are others. And the challenge for companies in this business is to make sure consumers and merchants have the necessary hardware and software to complete the transactions.

Battery life of phones needs to be improved. I'm sure everyone would benefit from longer lasting batteries, but if mobile digital wallets are to hit the mainstream then the phones better have enough juice to last longer than a day.

"You don't want to get into a situation where you can't pay for dinner because your wallet battery died," Elkin said. "This is a real practical issue that has to be addressed if you are going to expect people to replace their physical wallets with a digital one."

Benefits from credit card rewards programs must be available for digital wallet and mobile payment transactions. Why do most people use a credit card to pay for things when they could use a debit card or even cash? Many times it's because of the rewards they get when they use a certain credit card. Whether it's frequent flier miles or cash rewards, Americans have grown accustomed to the rewards of credit cards. The bottom line is that there needs to be a financial incentive to use one method of payment over another. The credit card industry has done a brilliant job of creating this difference over the past 20 to 30 years. And mobile payment systems that do not allow credit card rewards programs to accumulate via mobile transactions are handicapping themselves.

The mobile payment market needs to consolidate and a standard way of making payments needs to emerge. The mobile payments market is a confusing mess right now. The technologies are fragmented, and there are way too many companies offering solutions that Elkin says it's counter productive to the growth of the market.

"The number and scope of the different mobile payment solutions currently available or preparing for launch in the next six to 12 months will have contradictory effects on the market," he said in his report. "On the one hand, more solutions, and the media attention they bring to the mobile payments segment in general, will raise awareness for consumers and merchants. On the other, the sheer number of choices will present a challenge for both groups, but for merchants in particular, who may incur significant costs in choosing one solution over another, especially in cases where a solution entails new POS [point-of-sale] hardware."

Companies invested in the mobile payment market agree that they need to address these issues and give consumers a reason to adopt mobile payments. They believe that even though consumers may not be asking for a mobile wallet now, that doesn't mean they never will. And in fact, it's the industry's job to create the compelling use cases that will make using a phone to buy things so much easier and better than paying with a credit card or cash.

"Henry Ford once said that, 'If I had asked people what they wanted, they would have said a faster horse,'" said Dodd Roberts of the Merchant Customer Exchange, the mobile payment consortium started by Wal-Mart, Target, Best Buy and Lowes. Roberts spoke on this topic recently at the CTIA's MobileCon show in San Diego.

"The average consumer may not know what he wants or needs," he continued. "My experience is that engaging customers in commerce could be so much better via mobile payments. It's solving a problem as much as it's enhancing an experience."