Mobile wallets perpetually struggle for relevance in the U.S.
Everything's in place for mobile payments to supplant plastic cards in the U.S. — except for a compelling reason for the transition.
Even after years and billions of dollars in development and marketing from some of the largest U.S. corporate brands in banking, technology and the mobile industry, most U.S. consumers still don't find anything wrong with using plastic cards, and a scant few use mobile wallets to make payments.
Without a problem to solve, mobile payments are stuck being "a cool" technology. That was fine five years ago, but consumer technology doesn't mature until it's no longer considered cutting edge. For U.S. consumers, mobile payments are at best a hip alternative.
It's likely 2018 will end with mobile payment apps facing another "crossroads" year in 2019, where it either becomes more common for all sectors or remain a bastion of a handful of early-moving customer and retail segments. It's a vexing problem that dominates the market, including at events such as the recent Mobile Payments Conference.
But the technology is in the right place, on people's phones. For those looking for a reason to believe, there are signs of hope to counter the headwinds.
Mobile is maturing elsewhere
One theory says if mobile payments are advancing in various other countries, it is bound to eventually take hold in the U.S.
Not everyone agrees with that simplistic statement, but there is mounting evidence that payments through social media channels and non-network mobile schemes are growing dramatically.
"Every part of the developing world is growing faster than the developed world in mobile payments and a lot of this is not network card-based," said Thad Peterson, Aite Group senior analyst.
Noting the advancement of WeChat Pay and Alipay in China and other established mobile systems like M-Pesa in Africa, Peterson predicts global network payments will fall behind non-network payments volume in the next five to 10 years.
Citing Capgemini's World Payments Report of 2017, and Aite research, Peterson said the trend shows the potential for 715 billion non-network mobile payments by the year 2025 in emerging markets, compared to 485 billion in mature markets.
"The majority of the millions of consumers in Africa, Asia and Latin America are using mobile payments that are not linked to U.S. card network products," Peterson said.
In addition, the faster payments initiatives in place or developing in 39 countries, including the U.S., are not card-based, Peterson said.
And mobile payments and other digital commerce are growing in the U.S., just not as fast as elsewhere. Digital commerce's share of U.S. retail transaction volume has steadily increased, at 8% of $5.5 trillion in 2017, and a predicted 9% of $5.8 trillion in 2018, according to Aite research. The prediction for 2020 is 11% of $6.2 trillion in sales.
People use mobile ... to pay each other
The growing adoption of P2P services such as PayPal's Venmo, the bank-supported Zelle network and Apple Cash is evidence that adoption of complete mobile wallets could follow.
P2P services tend to attract the attention of younger consumers who are less inclined to visit bank branches, ATMs or use their mobile banking apps as often. "It's why PayPal acquired iZettle and why Stripe is moving into the physical POS area," Aite's Peterson said. "We can assume permanent disruption at this point, and payments will never be the same again."
The U.S. is already seeing Chinese visitors using Alipay and WeChat Pay here, Peterson added. "And those wallets dominate in China because of national mandates."
Omnichannel shopping's another driver, as mobile allows a merchant to control the consumer interaction and experience on their branded platforms. Retailers can take that opportunity to educate customers about how mobile works and why it is better, said Jack Philbin, CEO of Vibes, a mobile marketing company.
Rather than monitoring sales receipts, merchants will need to track consumer engagement length, or how often and how long customers are interacting through mobile. There's a greater chance a payment may take place during that time.
"Retailers are all playing defense now against Amazon and they really need to be playing offense," Philbin said. "They have the one-on-one relationship with their customers and have to use that and develop it more through mobile."
Starbucks' original iPhone app debuted in 2009 by emphasizing loyalty to encourage more mobile use, a strategy that's worked with other quick service chains. That strategy may not be directly applicable to non-daily purchases like coffee, but the spirit resonates. Payments is but one part of a much broader relationship.
"Starbucks did not start with a payment, they started with a customer experience," said Michelle Tinsley of consulting firm Tinsley Retail Insights. "Retailers are under a lot of pressure, and in the past they would say no to integrations at the point of sale, but they are now saying let's integrate — and it is starting to take off."
Tim Willi, managing director and senior analyst with Wells Fargo Securities, believes U.S. consumers may find using their smartphone for tap-and-go payments to be a natural thing in the not-too-distant future.
"The push for contactless cards in the U.S. will help mobile in the long run, because it is basically the same, as you tap a card or you tap a phone," Willi said. "If you already have your phone in your hand, it will be just as easy to use that as it would a card."
Too many rules?
It's not just consumer inertia. Regulations may also be too complex.
"The elephant in the room is that payments are heavily regulated and many ideas for mobile payments are killed by the need for so many money transfer licenses in the U.S.," said Brenna McGee, a payments attorney at Dykema Cox Smith.
Any company seeking to advance a mobile payment or digital commerce scheme has to obtain more than 50 state licenses to be a payments transmitter in the U.S., McGee said.
"That is very hard for startups and innovators to play in this regulated space, but regulators are actually trying to help ease that," McGee added.
A process like the PSD2 data sharing in the U.K that allows fintechs to access data in order to sell products could potentially carry over to the U.S. But obstacles will always remain.
"The banking world is very conservative and this technology can be risky, so startups have trouble getting an account," said Jordan McKee, an analyst at 451 Research. "The banks and much of payments are still running on legacy systems, so it is hard for developers to come up with a great idea and then learn that running it on a legacy system just doesn't work."
That is why real-time payments initiatives, like the Clearing House's Real-Time Payments scheme, have so much support. For the past five years, the Federal Reserve has encouraged any developments in the U.S. that can become a part of a bigger puzzle in the future.
"Our infrastructure in the U.S. is 40 to 50 years old now," said Peter Gordon, who recently launched the Payments Relationship Management advisory firm. "In India and China, the infrastructure is regulated, so they put in brand new systems that are accelerating the use of mobile payments."
As soon as the industry views a mobile wallet as a functionality as opposed to a product, it will have a better understanding of its place in the ecosystem, said Travis Dulaney, CEO of Push Payments, a real-time payments scheme. "Uber is a mobile wallet, because it has all of the traits everyone wants," he said of the ride-sharing company's embedded payment process.
The fast technology development and myriad new features are also thrown on top of the high interchange rates retailers pay for card-not-present transactions through mobile devices, Dulaney added. "Merchants don't want to pay interchange for a CNP because it's an old formula created to solve a risk that doesn't exist in mobile," he said. "We need unity in the way we are going to execute mobile."
Where mobile is working
If the mobile payment wheels grind slowly at the physical point of sale in most sectors, it does have its fans in a growing number of transit or quick-serve restaurant locations.
Mobile is increasingly popular in the order-and-pay-ahead service model, or through delivery services like Door Dash or Uber Eats. In addition to transit ticket payments and scanning, mobile is also finding its place in real-time payments to the gig economy's freelancers and the drivers for Uber or Lyft.
That helps merchants understand the many omnichannel advancements, and about how payments can be embedded in various customer or employee experiences.
Also, the underbanked population has always found a mobile device, an accompanying app and access to some type of prepaid account as beneficial for transferring money.
"There is a huge segment of the market with consumers who have no bank accounts, but want to interact with the financial and payments system," said J. Armando Guzman, director of Cuallix, a provider of nonbank financial services.
"They can be provided a payment card tied into a mobile app," Guzman said. "It takes that segment of the market and provides the experience of the rest of the market."
In a similar manner, payment processing companies can acquire cardholders through social media channels and deliver digital services — neither of which were available prior to the onset of mobile devices becoming nearly ubiquitous. For example, Greenlight offers digital cards to parents that can be customized for their teens to use through an app, said Scott Johnson, senior vice president of business development at Galileo Processing.
Can old habits die?
As complex and fragmented — and dated — as the U.S. payments market is, the advancement of mobile payments may come down to a much simpler question. Can U.S. consumers break old habits — the key one being the time-tested method of swiping or dipping a plastic payment card, or pulling out cash for a small-value item?
"Habits shift, and we will eventually reach a point where smartphones take over our lives in the payments space, too," said Jason Oxman, CEO of the Electronic Transactions Association.
Examples abound for actions consumers experience on their phones now that used to call for other forms of interaction, Oxman said, pointing to no longer purchasing CDs for music or separate GPS devices for our cars.
"But people are so accustomed to plastic cards — and they work — so it will take us awhile to get there (a complete mobile experience)," Oxman added.
The experience at a point of sale hasn't changed much over the past several decades for most consumers, making it difficult for a new technology to just change that in a short period of time.
"If mobile affects only the last part of the two-minute POS experience, that's a problem," said Cliff Duffey, president and founder of security technology provider Cybera. "You have to create an app to deal with all of the other aspects of a shopping experience, and help the consumer determine which card to use, as well as providing product and warranty information."
Not only is the payment aspect alone not compelling enough to convert a consumer to a mobile wallet, the technology has to work without a glitch or frustrating steps, said Matt Donnelly, vice president of security and solutions at Freedom Pay, which focuses on payment technology for the hospitality and entertainment sectors.
"There is not much of a consumer experience with mobile now through the various 'Pays' because they are just another way to make a payment," Donnelly said.
"And often, there are too many steps. You open the app, you select the card, you tap at the terminal, which may or may not work the first time. And then a clerk may not be able to help you."