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Time's Running Out for Banks to Get into Mobile Payments

Using a mobile phone to pay for something at a store still isn't that big a deal — Forrester says such activity represents only 4% of mobile payments in the U.S.

But the time may finally be arriving for in-store mobile, or proximity payments executed by mobile devices. In new research, Forrester says consumer comfort, expanding technology options and migration toward payment security standards are combining to put mobile point-of-sale payments on the brink of fast growth.

While the relatively sluggish advance of contactless mobile payments at the point of sale may have kept some acquiring banks and merchants on the sidelines, that's a luxury that is no longer an option. "It may be easy for banks to think that existing payments work well and there may be a temptation to relax a bit and think that the [current payments methods] will still work for a while, but that is a trap," says Denee Carrington, an analyst at Forrester who specializes in payments.

Forrester says that in 2012, consumers spent nearly $13 billion via mobile payments, which is defined by the company as a transaction in which the transfer of funds is initiated by using the mobile phone, but not through a phone call. Mobile payments in the U.S. are growing at a 48% annual compound growth rate, with the total mobile payments volume reaching $90 billion by 2017.

Also rapidly changing are the types of mobile payments. Right now, mobile remote commerce — or using the mobile phone to make a web-style purchase, makes up more than 90 percent of all mobile payments and is generally the low-hanging fruit for technology. "That requires only a smartphone and access to an app or a website; most of the infrastructure for that is already there," Carrington says.

But mobile remote commerce will increasingly give way to proximity payments, which requires more from banks in terms of technology adoption and merchant and customer acquisition strategies. Mobile proximity will increase from only 4% of the current mobile payments market to 45% by 2017. The third type of mobile payments tracked by Forrester, remittance or person to person payments, is expected to remain a small portion of the mobile payments market — staying steady at about a 5% or 6% share.

Most of the growth in mobile proximity payments will come in 2014 and 2015, when the proximity payments share is expected to jump from 5% to 12% to 31%.

That growth corresponds with what's expected to be an influx of enabling technology for smartphones, as well as a migration of in-store payment acceptance and processing hardware to accept chip and PIN payments to comply with liability shift deadlines connected to the Europay, MasterCard and Visa (EMV) standards migration.

Carrington says 2013 will be the year technology options that enable contactless payments, such as near field communication (NFC) and barcodes, will get tested in parallel to EMV migration. At the same time, consumer awareness will increase as recognizable brands such as Starbucks (SBUX) adopt mobile payment solutions that are also increasing in public awareness, such as Square. As is the case with other forms of electronic commerce, consumer acceptance will force banks to adopt.

Forrester says only 2% of consumers are using proximity payments instead of cash or plastic at the point of sale, but 36% say they are open to the method. The research company says the factors boosting consumer comfort include easier checkout technology, such as Payfone's 1 Touch Checkout which transfers the mobile shopper's payment credentials from their bank to the merchant.

Also, new ventures such as Trustonic — a joint venture that includes Gemalto (GTO) and Giesecke & Devrient (G&D) — are increasing the authentication and encryption used to secure data used in transactions. Additionally, digital wallet providers such as MasterCard (MA)'s PayPass Wallet and Visa (V)'s are combining digital wallet use with in-person point of sale use of mobile proximity payments, which Carrington says integrates mobile proximity payments with other mobile commerce uses.

"Banks need to get in the game, and determine what kinds of offerings or products their consumers want, as well as partner with third parties. It's time to think about strategy now," Carrington says.

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