When a new technology comes along, it's often easier to be enamored with the device itself than to envision its potential impact. Go back in time to the horseless buggy — the automobile. When the car was first invented, the benefit was thought to be that we no longer needed a horse to get from point A to point B. What the early inventors did not recognize was that the automobile was going to revolutionize everything about our economy and in turn become one of the single most important innovations in history. Will the mobile device be looked at from a historical standpoint as another major technological leap that changes history?
The mobile device is no longer simply used to communicate by voice, but rather it has begun to create its own economic ecosystem. There is one word that can best describe the mobile device's meteoric rise in acceptance: "convergence." If you think about it, the mobile device has not created anything new, but rather has taken proven technologies and placed them in one device. Voice calling, video games, cameras, GPS, and online access were all created separately from the mobile device, but no other device was able to combine all these technologies in one unit.
The mobile device is no longer our "horseless buggy," but instead has the potential to create its own economic ecosystem. However, this process has not yet made the leap into conducting financial transactions on a widespread basis. A recent IDC Financial Insights poll shows that while mobile banking is gaining in popularity — with the number of people who use it doubling since last year — it still is far less popular than the branch, the call center, or online channels.
Mobile banking really needs to be thought of as two separate applications. The first is to provide customers with access to account information and balances, and the second is to move funds. This movement can be either done via traditional bill-payment tools or internal transfers. The hard stuff comes with the next segment of funds movement — those outside the banks' payment systems. These can be external transfers, payments within a mobile network, or payments outside of the mobile network.
By way of definition, a payment inside a mobile network can be thought of as potential micro-payments that are settled through the mobile carrier's network. Payments outside of the network can be those made with the actual device itself. This can be done via internal chips embedded within the phone, often referred to as near field communications (NFC), or through the use of stickers that provide a similar transmission service. Financial institutions could potentially lose control of the payment and revenue opportunities if these transactions are done in such a way as to bypass debit and credit card exchanges.
It's fair to say the American consumer has been very accepting of the mobile device becoming their primary device for voice calling, snapping candid photos, and providing quick messages to friends and loved ones. In fact, a recent survey shows that those of us with land lines are a dying breed as more people become comfortable with having just their cell phones as their primary means of communication. Technologies now being built into mobile devices are also providing excellent features and functionality that could replace most point-and-shoot cameras, while purchasing separate GPS devices seems to be fading as the mobile device becomes the platform for a wide range of applications.
So will the same hold true for plastic debit and credit cards? The answer is not in the near term. There is too much invested in the point-of-sale infrastructure to completely abandoned this technology. In addition, there are numerous security concerns that will need to be addressed. How easily will people be able to wipe a mobile device clean if it is lost or stolen? How will the carriers handle their vulnerabilities? And will consumers be comfortable having all their "plastics" housed in one device? Until we have firm answers and regulations in place to properly protect consumers, mobile payments may continue to languish.
One example of a bank trying to jump-start mobile payments is Stoneham Bank of Stoneham, Mass. It has partnered with Bling Nation of Palo Alto, Calif., in an attempt to potentially increase their consumer deposit relationships, and also grow and develop commercial relationships. They are busy rolling out their solution in the Boston suburb and have close to 20 merchants already participating.
Consumers today are comfortable with the cashier asking them if they are paying by cash, check or plastic. Merchants are fine with the established point-of-sale device structure we have in place today, and financial institutions are standing firm with their models of interchange income in exchange for managing risk and fraud. Unless there is something that disrupts this cycle, and if the system is able to determine who will be responsible for shouldering the investments, then the mobile payment market will sit on the sidelines for the near term. However, the sector will continue to see growth and financial institutions will need to develop a less defensive strategy around the entire mobile realm. As we continue to see investment in the mobile market by both bankers and consumers, do not be surprised when someday the cashier asks if you will be paying by cash, plastic or mobile.
Marc DeCastro is research manager for consumer banking at IDC Financial Insights.
