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Mobile Wallets, Contactless Payments Overhyped: Analysts

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LAS VEGAS — Established payment card networks are well-positioned to continue generating profits over the long haul, as long as they continue adapting to changing payments technology, a panel of investment industry analysts told attendees Nov. 3 at the ATM, Debit & Prepaid Forum. But Near Field Communication-based mobile payments and mobile wallets might fall short of expectations, the analysts suggested.

"I think mobile wallet and NFC is getting way too much hype," Tien-tsin Huang, managing director and senior analyst with New York-based J.P. Morgan Securities LLC, said.

For NFC-based two-way mobile payments to catch on widely, thousands of larger merchants would need to upgrade their payment terminals to process transactions from mobile devices, and so far there is no compelling reason for them to do so, Huang suggested.

"Merchants aren't really incentivized to invest in new terminals, which I think typically have a five-year life cycle," he said, adding that the payments industry may evolve in other directions even beyond NFC.

As for mobile wallet initiatives such as Isis and Google Wallet, "all the business models changed within six months," Huang said, noting that such rapid change is making it difficult for standards to emerge. "I think (mobile wallet development) will be pretty slow."

While some of mobile payment's promises are compelling, potential players are struggling over data-capture issues, Huang contended. "Everybody is fighting to see who will own that, and who will own search, at the point of sale," which may bog down development.

Payments industry innovators must also avoid overloading consumer payment channels with marketing messages, which is a risk with NFC-based mobile payments enabling marketers to tout customized deals to consumers, warned Glenn Fodor, vice president, senior analyst, New York-based Morgan Stanley.

"[Target marketing] is where we see emerging tech really changing things, whether it's mobile technology or social media," Fodor said. "[But] I don't need six alerts from Starbucks saying that there's 50% off on a latte. A lot of good stuff going on but [payments players] must manage it properly or people will get turned off," Fodor said.

The best mobile payments ideas are those based on what consumers are asking for, said Julio Quinteros, vice president and senior analyst, New York-based Goldman Sachs & Co.

The effect of combining customer details, preferences, location and payment capabilities in mobile payments could be "much more efficient" than existing payment methods, Quinteros suggests, but he says that evolution may take longer than many anticipate.

"Ultimately that stuff will take some time to materialize. From a numbers perspective, mobile is still small," Quinteros said.

For payment card networks, the key to growth and profits over the next several years will be continued technological innovation and flexibility, the analysts agreed.

Winners will have "business models that are flexible and can adapt to how the industry changes," Fodor said, noting that while credit card spending has been on the rise recently, a lot of that payment volume shifted away from debit to credit. "People are respending on existing cards, which is why flexible business models are more attractive" and can help networks and card issuers react to economic and consumer-behavior shifts, he said.

Observers can expect to see more consolidation among payment industry players, Huang said.

"Consolidation is going to be on the rise...we've seen a lot of it in the last 18 months," he said, pointing to Visa's 2010 acquisition of ecommerce specialist Cybersource Corp. as a good example of the way card networks are working to "leverage technology" to capture more data and "get closer to merchants, acquirers and customers."

MasterCard, because of its lower market share in credit and debit card transactions and purchase volume, has placed itself in a position to "play more offense than defense with Visa," Huang said, which bodes well for its prospects. But Visa has very strong long-term profit prospects, he said, especially as its purchase volume continues to grow outside the U.S.

Amex is also in a relatively strong position to increase profits long-term, given its proprietary network and recent moves to invest in new payment technology, Quinteros said. "[Amex] can do things that are definitely advantageous because of how they control their network...with prepaid [cards] and mobile wallet, they are taking all the steps they need to take."

Serve, the mobile wallet platform Amex launched in March, "could be a pretty powerful platform for them; that could be the angle for them to participate in cross-border [transactions] where they are missing some," Huang said. "It feels like [Amex] has some good potential there, it's just a question of how heavily they want to invest."

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