Much like the story of the emperor's new clothes, mobile payments may be a case where the young see one thing and their elders another.
College students who won the top slot in a contest sponsored by the National Retail Federation Foundation and American Express Co. have determined that in a retail environment, mobile payments is not ready for prime time.
"Basically, the students did the research, and they found it is too early in the adoption process for the industry," said Jerry O'Brien, executive director at the Kohl Center for Retailing Excellence at the University of Wisconsin, Madison and leader of the winning student team. The students also concluded that mobile payments would be critical in the coming years, but that retailers should wait until consumer technology bears the burden of the infrastructure and the cost, not the retailer.
"The students believe the technology for the smartphone will very soon enable them to [make payments] without a big input of cash from the retailer" to implement the new technology, O'Brien added.
The students were part of a winning team presenting their findings at the Jacob K. Javits Convention Center in New York on Jan. 10, during the National Retail Federation's 100th annual Convention and Expo. The competition is in its fourth year.
The competition pits six university teams against one another. In a twist, the students don't compete as teams from their own universities, but as mash-ups — one person from each university is chosen to compete with one person from every other university. They collaborate virtually, using tools such as Web conferencing, and compete against five other teams chosen in the same way. They play executive roles in finance, store operations and design, e-commerce, and information technology, among others, to formulate their case studies.
"This is similar to the global way that retail operates today," said Katherine T. Mance, executive director of the NRF Foundation. Executives, buyers and suppliers collaborate virtually today as well, she said.
The case study was based on the creation of an imaginary national department store chain, called Clements, whose sales had begun to languish and whose buyers were aging. The chain has 1,006 locations and net sales of $16.9 billion. Its e-commerce customers presented a growing opportunity: an average basket size of $80, 60 million unique users and 2009 sales of $360 million. The students designed a mobile application for its tech-savvy customers to let them check information about products and inventory, create shopping lists, find store locations and hours, register for loyalty programs and other tasks, including social media interactions.
But notably missing from the mobile app was a payments function.
At the point of sale, mobile payments systems are typically planned around the use of a near-field communication chip for contactless payments, but "the cost for [NFC] technology is very high, and it is too early to enter the market," the students said in their presentation.
Upgrades would cost about $200 per terminal, the students noted. They estimated that by 2014, only a sixth of smartphones would have NFC chips and users of NFC in-store would merely cannibalize from the store's Web channel rather than attract new business.
Industry analysts said the students made a shrewd assessment, but they pointed out that NFC is not the only method for mobile payments.
"NFC is only one way you might use to make connections at the point of sale," said Richard Crone, chief executive and founder of Crone Consulting LLC in San Carlos, Calif.
To date, Crone said, most NFC pilot tests have been heavily subsidized in the U.S., and in the coming year retailers will likely experiment with mobile payments that require few new upgrades to hardware for either the telecommunications companies, the banks or the retailers.
Crone also pointed out that merchants that are early adopters of mobile payments would get valuable information about their customers, enabling them to push things like marketing and coupons.
"From the merchant perspective, the one who enrolls is the one who controls," Crone said.
John Devlin, practice director for AutoID and Smart Cards for ABI Research Inc. in Oyster Bay, N.Y., agreed.
"It should be recognized that mobile NFC is not a stand-alone project," Devlin said by e-mail. "It works well with contactless cards and the cost for the introduction of either can be 'shared' by opening the market for the other." Devlin added that perhaps a bigger barrier to retailer acceptance of NFC is the higher interchange that merchants can be charged for contactless transactions.
"What I am now seeing in some European countries is that smaller interchange fees are being charged for micropayments, specifically to get the retailers on-board and supporting or promoting contactless payments," he said. "This seems to be helping drive the installation of the necessary infrastructure."
Marconi Pacific in Bethesda, Md., whose research the students examined, among other firms' research, said a store application built for both Apple Inc. iPhones and phones that run Google Inc.'s Android software would still reach only about 9% of all mobile phone users in the US. Only a fraction of those phones would be NFC-enabled.
"These numbers are very small and retailers are looking at these very small numbers and saying, why would I put several hundreds of thousands of dollars into new hardware, and millions of dollars" of technology support. "No rational executive would," said Michael Morgenstern, a principal with Marconi Pacific.
Morgenstern said ubiquitous mobile payments were more than three years away for retailers and others.
American Express, which would not comment specifically on any of the student presentations this year or the findings of the competition's winning team, said it was most intrigued that social media had become part of the student presentations.
"Four years ago there was no mention of Facebook, or anything close to it," said Christopher Hollins, vice president of retail industry merchant services America for American Express. "And now there is."
