Maybe mobile payments won't be such a bonanza for banks after all.
Several major banks and credit card companies are pushing the idea that mobile phones will eventually offer contactless payments, arguing that the capability could drive up transaction volume and revenue.
But according to one analyst, turning phones into payment tools will largely cannibalize existing card transactions, and much of the incremental gains will be eaten up by the costs of developing the technology and getting it into consumers' hands.
"The only thing that makes a difference to a bank is how much more transaction volume you can get from an account," said Red Gillen, a senior analyst at Celent, a financial research and consulting firm based in Boston. "They should not set their expectations too high."
How high is not too high?
According to Gillen, $1.83, per debit account, per year.
That limited increase aside, most observers agree that near-field communications, the technology behind contactless payments, is coming to a handset near you, sooner or later, and the technology has the potential to change consumers' payment behavior. NFC, future-watchers say, could open the door to a wide variety of new uses, including mobile marketing, "smart posters," or swapping photos or music files.
And while Gillen acknowledged in an interview that his analysis may not take in all the potential uses of NFC-equipped phones, he noted that many of these uses do not generate interchange fees.
Gillen's study, released Tuesday, said that besides existing card purchases, banks are hoping NFC-enabled phones will capture a significant portion of about $225 billion in purchases that are made with cash today, or about $500 per card; in early trials, users have shifted 10% to 20% of their cash purchases to NFC-capable phones, and Gillen estimated that once the technology becomes mainstream, banks can expect that number to increase to about 30%. That translates to $150 annually in incremental transaction volume, or $3.29 in increased interchange revenue for the issuer.
Subtracting out a bank's costs — provisioning the handset with account credentials; customer service; sending text message receipts — leaves the $1.83 net annual revenue gain per account, he found.
Many of the potentially most appealing applications for mobile NFC are already closed off to banks, such as transit turnstiles, Gillen noted. "A lot of cities around the world have already invested in these closed-loop systems," he said. "They're not likely to rip them out anytime soon so they can accept Visa and MasterCard."
Banks have been swept away by marketing hype around mobile NFC, Gillen said.
"There are some banks that will do it because of marketing and prestige reasons. There are some banks that are scared not to have it," he said. "But a banking relationship is not form factor-dependent. It's about interest rates, where's the nearest branch, it's my dad's bank — things like that."
He also said that given the low anticipated return from mobile payments, banks should be reluctant to consider subsidizing the mobile carriers' expenses in installing NFC chips in their handsets.
Dion F. Lisle, an executive vice president in the growth ventures and innovation unit of Citigroup Inc.'s global consumer group, said his company believes in the future of NFC payments, arguing that the technology could be a game- changer like Apple Inc.'s iPhone or Amazon.com Inc.'s Kindle.
"It doesn't jump out at you as the opportunity of a lifetime," he said, "but it's enough of a trend to get you started down that path."
Visa Inc. and MasterCard Inc., which are both developing or testing mobile payments systems, did not make executives available to discuss the issue, nor did Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., which have all been early adopters of mobile banking services.
Barry McCarthy, the general manager of mobile commerce and point of sale at First Data Corp., a Kohlberg Kravis Roberts unit, said the incremental revenue argument misses the larger point — that once consumers become accustomed to the convenience of contactless payments, using a device they already have in their hand anyway, they are going to like it.
"This is going to be the consumers' preferred form factor for doing a transaction in the future," McCarthy said. "Consumers create demand. Companies that want to profit, profit by responding to that demand."
First Data is doing its part to stimulate that demand, this summer introducing its Go-Tag product, which incorporates contactless payment chips into stickers that consumers can attach to their handsets or anywhere else they want. For banks that want a "top of wallet" position for their cards, McCarthy said, "if you are on the phone, you have a much higher opportunity to be top of wallet."
And during this transitional period until NFC chip technology is integrated into handsets, "the Go-Tag is the ultimate top-of-wallet sale," McCarthy said, because users are unlikely to stick more than one such tag on their phone.
Fred Brothers, the managing partner of the technology consulting firm eCom Advisors in Dublin, Ohio, said community banks and merchants could play up this convenience angle to shift existing card transactions to lower-interchange debit cards, and away from high-interchange credit cards, a market dominated by a handful of huge issuers.
Such an approach would benefit merchants, by reducing their interchange costs, and increase transaction revenue for the community banks that are able to convince consumers to link mobile phones to their debit cards.
"The vast majority of banks are not big credit card issuers. They are dying to drive more debit card volume," Brothers said.
Influencing consumers to change their behavior that way is a place where debit card-issuing banks can earn a return on their investment in mobile NFC, Brothers said. "The ROI has to come from creating new transactions that didn't exist before or by cannibalizing transactions from somewhere else."
As NFC matures, banks potentially could find it advantageous to offer even lower interchange rates, as a way to encourage merchants to try to influence consumer behavior, Brothers said. "I truly believe NFC evolves over time as an alternative settlement capability, because it's connected."
Richard K. Crone said Gillen's estimates are far too low. His firm, Crone Consulting LLC, has found that banks could generate incremental interchange revenue of more than $18.80 per account annually from NFC-enabled phones by targeting new markets such as public transportation.
"Public transportation is the killer app for contactless cards, stickers and NFC-enabled phones, because the readers are already installed in most transit agencies and the customers are by nature mobile," Crone said. And though existing transit installations are closed loop systems, he noted that MasterCard and Citi are in trials with New York City's transit agency to work with contactless Citi MasterCards, and he predicted more agencies will choose open payment networks in the future.
Alastair Lukies, the chief executive of Monitise PLC, a British specialist in mobile banking technology, said NFC payments will be part of a broader universe of NFC capabilities, including offers and rewards, from a constellation of providers.
"I don't see it, stand-alone, as a killer app. I see it, fully integrated, as a real killer app," Lukies said.
The carriers' goal will be to use the full range of NFC applications to increase their average revenue per user, and banks simply need to be part of it, he said. "Combined, the ARPU is more than enough to go-around."
