The Federal Reserve Bank of Boston in conjunction with the Federal Reserve Bank of Atlanta released the U.S. Mobile Payments Landscape – Two Years Later, which examines changes in the evolution of mobile POS retail payments over the past two years.
In 2010, the Federal Reserve Banks of Boston and Atlanta (FRB), through their Payment Strategies and Retail Payments Risk Forum groups, organized the first Mobile Payments Industry Workgroup (MPIW) to discuss the benefits and obstacles to developing a successful U.S. retail mobile payments system. In response to expanded use of mobile payments and increasing interest among mobile stakeholders, the FRB expanded the MPIW’s scope in 2012 to enable broader participation from groups with a specific interest in mobile payments adoption such as merchants, vendors, start-ups and regulators.
The group dialogues were captured in a white paper published in March 2011, Mobile Payments in the United States: Mapping out the Road Ahead. Market changes since first publication drove the need for the FRB and MPIW to update the original white paper. The new report reflects what the FRB has learned from the MPIW. The key findings note that while the mobile landscape remains characterized by fragmentation, various developments have gained importance. These include:
- Convergence of channels
- Role of nonbanks
- Formation of new partnerships
- Unresolved security and privacy issues
- Increasing role of data monetization
m-commerce growing in USA
The report addresses the need to find a balance between achieving sustainable scale and increasing innovation and efficiency with technology. To ensure a secure and cost-efficient ecosystem, there will be a need for interoperability, industry guidance and standards. An open model could help build scale through consumer and merchant adoption. However, market competition and rapidly innovation have not created an environment for a uniform open model to become available.
Changes experienced by each ecosystem participant during the past two years were highlighted in the report:
- More/faster Mobile Network Operator (MNO) activity than initially anticipated: The 3 largest US MNO’s partnered with several FI’s and a payment network to create an NFC payments joint venture called ISIS. Sprint partnered with Google and Citi to launch the Google Wallet. The launch and adoption of App stores by Apple and Google removed the traditional walled-garden approach and reduced MNO control.
- Smartphone/Terminal Manufacturers and Mobile OS Providers have prepared for NFC but adoption lags: POS terminal manufacturers have enabled and included NFC in their platforms, however the costs and complexities have limited retailer adoption. Smartphone manufacturers and mobile OS providers have been enabling NFC from their platforms as well, but MNO’s have been slow to activate this functionality on their systems.
- Payment Processors and Alternate Payment Service Providers have modified strategies to support mobile payments: As NFC adoption has lagged, these ecosystem participants have increasingly turned towards Cloud & QR codes. Google Wallet, which initially launched with payment credentials stored on the phone and tied to the NFC element, has revamped their architecture to store payment credentials in the cloud and have the phone act as a virtual card. Rather than an overt payment wallet, Apple launched Passbook to store items such as tickets or loyalty cards that interact with POS systems via QR codes.
- Payment Card and ACH Networks see increased competition as they too try to expand capabilities: As new entrants encroach their core businesses, the payment networks have expanded the scope of their offerings by investing in mobile payment acceptance at POS, prepaid, transit and P2P.
- Debit/Prepaid Card Networks are seeing growth: Both new entrants (Green Dot) and incumbents (Amex/Bluebird) are seeing growth by expanding financial services to the traditionally unbanked and underbanked.
- ACH Network usage expands into new applications: FI’s and non-bank players are developing internet and mobile solutions to use ACH for P2P and internet purchases. Several m-payments companies and merchants are exploring ACH due to its lower cost.
- FI’s hope to maintain industry position with measured tests: FI’s are experiencing competitive pressure, but are viewed by consumers as the most safe and secure payment providers. They have participated in trials with both large and small initiatives in emerging and mobile payments.
- Merchants push to improve cost/benefit model for mobile payments: Merchants consider m-payment to be a component of an overall mobile strategy. They have also pushed back on existing and incremental costs due to transaction fees as well as operational and implementation costs in light of the uncertain benefits that m-payments can drive.
- Consumer usage of mobile payments will increase: As smartphone adoption increases, and financial services expands to the underbanked, mobile payments usage will increase. This needs to be matched with improved disclosure and consumer education.
- Regulators can leverage some existing work, but industry seeks additional guidance: Since mobile payments leverages existing payment systems, much existing regulation can translate across. However, industry perception is that regulators have not kept pace with the industry and additional guidance would help create a more sustainable system. Additionally, due to the entrance of new non-bank entities in this space, reinforcement of existing regulations would be helpful.
- The initial report published several benefits of a mobile payments system. The report included a progress report towards each of these benefits.
- Improved Security and Fraud Detection: Too early to tell. EMV has decreased card fraud where implemented. Emerging mobile ecosystem could create new opportunities for bad actors.
- Merchant Cost Efficiency: More Work Required. While merchants are still participating in tests, a clear business model for merchant implementation is still needed.
- Competitive Technologies: More Work Required. Initial expectations that NFC would be the key POS payment technology have not materialized. Additional technologies such as QR codes could facilitate mobile payments adoption but there have been no frameworks set about interoperability.
- Value Added Services: Significant Progress and Opportunity. From both Retail and Transit perspectives, there has been significant progress in application development as well as demonstrated consumer interest and usage.
- Revenue and Monetization Opportunities: More Work Required. Existing initiatives involving advertising revenue (Google Wallet) or revenue share for secured element access (ISIS) are still being worked through.
- Data Privacy: More Work Required. Consumer data in mobile payments platforms can be valuable and incorporate new forms such as location. There are no current industry standards yet, and new non-bank entrants could use reinforcement about existing regulations.
Based on the trends from the last two years, the MPIW updated their strategic principles, which are stated as follows:
- Open Wallet concept has evolved to include both mobile and digital wallets
- Convergence of multiple technology platforms (NFC, QR, etc.) for mobile payments
- Establish a ubiquitous platform for existing and new clearing and settlement rails
- Dynamic data authentication provides long-term integrity and security for transactions across all channels
- Develop and adopt a global interoperable platform in the U.S. for mobile payment standards and certification of payment methods, leveraging existing standards where possible
- Neutral Trusted Service Managers (TSMs) should oversee the provision of shared security elements used in the mobile phone for an NFC solution
- Regulatory clarity
- Understanding the Role of Nonbanks in the Mobile Payments Ecosystem
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