While mobile payments transform financial life in many less developed countries, retailers and payment providers in the U.S. and Europe are still trying to find the right incentives to drive adoption.
The added convenience of mobile payments won't inspire consumers to switch from credit cards in countries where credit cards are widely used, industry observers said at the Mobile Commerce World conference in San Francisco this week. But special offers and services could attract consumers, and small businesses disappointed with current payment systems may be among the first to make the switch, they said.
Financial services built around mobile networks and simple phones are the first form of banking for consumers in many less developed countries and are growing rapidly, according to Bill Gajda, head of global mobile products at Visa. The trend has moved beyond the well-documented success of the M-Pesa service in Kenya, he said.
The bKash service in Bangladesh, one of the fastest-growing mobile payments offerings based on technology from Visa's Fundamo subsidiary, lets consumers put cash into their mobile accounts at small, local merchants and then spend that money at other merchants, pay utility bills, or send it to friends and relatives, Gajda said. In less than two years, bKash has attracted 2.2 million users and is adding 11,000 users per day, he said.
"This is an enormous opportunity to really replace cash and check, with its inconvenience and in many cases ... lack of security in these markets, with a very safe way to make mobile payments," Gajda said.
By contrast, credit cards are so widespread and easy to use in most developed countries that mobile commerce innovations will have a much rougher road to acceptance, Gajda and others at the conference said. For example, NFC (near-field communication), which lets consumers buy things by tapping their phones against a pay terminal, is growing slowly because of the alternatives available, Gajda said.
"The United States is not going to be the lead market for NFC," Gajda said. That's because swiping a magnetic-stripe credit card, which often doesn't even require a signature in the U.S., is quicker even than using chip-and-PIN cards found in Europe, he said.
The difference in ease of use between U.S. and European cards is negligible when all the steps in a transaction are included, said analyst David Schropfer of the Luciano Group consultancy. But richer and poorer countries are worlds apart in the need for mobile commerce, he said.
What may drive NFC adoption most in the U.S. is the coming requirement for retailers to adopt chip-and-PIN systems at their points of sale, according to Schropfer. Starting in 2015, credit-card companies plan to shift liability for fraud to retailers unless they adopt chip-and-PIN systems, which the companies say are more secure. The new point-of-sale systems will all be equipped for NFC, too, he said.
The impending change opens up space for startups with mobile variations on the current credit-card infrastructure or totally new payment systems, Schropfer said.
Much of the battle of payment systems will be fought over small, local merchants, according to three startups represented in a panel discussion at the conference. Dwolla, PayDragon and Groupon's Payments division are targeting small businesses that they say are paying more than necessary for the ability to accept credit cards.
"The cost of payments is too high for most merchants. ... It's really not fair, in my opinion," said Sean Harper, director of product management for Groupon Payments. It's true that small businesses typically pay higher fees than big chains, just as they pay more for commodities, because they don't have the negotiating power of retail giants, Schropfer said.
Small businesses looks to be where much of the disruption of mobile commerce will happen, Groupon's Harper said.
"They don't have any allegiance to their existing payment system because it's not serving them very well," he said. Groupon takes a smaller share of each sale than regular credit-card companies, and it can also use data about payments to help businesses attract customers, Harper said.
To sell consumers on changing their payment habits, businesses and vendors in advanced countries will have to offer discounts or other benefits, analyst Schropfer said. In that sense, mobile commerce today is like a vast laboratory of experiments to find what will motivate users to try something new.
PayDragon thinks it's found a way to give consumers something they can't get with other methods of payment. One service it offers is the ability to pay for food at a restaurant while standing in line and looking at the menu, in order to save time at the checkout counter.
But PayDragon has to get the restaurant to adopt its system first, then attract consumers one step at a time, said Hamilton Chan, the company's CEO.
"It's a very, very tricky and daunting task to make all of this happen," Chan said. Consumers have to know about the company and have an Internet connection to download the app, then create an account and associate a credit card with it, and then make a purchase and get in the habit of using the system, he said. "Going down that funnel is extremely difficult."