The developing mobile payment market is about to start over, according to David W. Schropfer, chief mobile payments analyst at the Luciano Group and author of "The Smartphone Wallet." It isn't often that you make a product then build an industry around it; but Schropfer said that's exactly what Google Wallet, Isis and other mobile commerce hopefuls in the U.S. are looking to do
Schropfer made his remarks in his keynote address to attendees at the Emerging Payments Conference in San Diego, Calif. The event was Nov. 14 -16 and brought professionals from payment networks, financial institutions and merchants together to discuss emerging payment methods.
Building without blueprints
In his address, Schropfer said previous successful mobile payment products in developing markets, such as M-Pesa in Kenya, would not provide a useful guide to predict what the mobile payment market will do in the United States. He said a better model is one based on loyalty programs, stored value cards and traditional mass-media advertising. These are also industries and revenue sources that will drive the emerging mobile commerce models in the U.S.
In an email to Mobile Payments Today after the event, Schropfer expanded on his keynote remarks: "By all accounts, the payment system seems to be doing great, but the mounting pressures from regulatory, technology, and market factors will, best, prevent new companies to expect to capture substantial revenue from the payments ecosystem, and at worst, will force the industry to find aggressive new ways to maintain market share, including cost cutting, and price competition.
"Either way, the existing payments model simply will not substantially support new entrants that expect to exist off of interchange."
According to Schropfer, 63 percent of all transactions will be done on general purpose, credit and debit cards in 2012, a number that has steadily increased over the past five decades.
The move to mobile payments
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While the system may not be broken, according to Schropfer, pressures on the payment networks and new technologies available to merchants and consumers mean that mobile payments will begin to gain ground on traditional payment methods.
For instance, Schropfer said smartphones in the hands of consumers, and new smarter POS terminals for merchants, turn those devices into "connected computers," meaning the devices can now share more information with one another, and other members of the payment ecosystem. And NFC technologies, Schropfer said, can make that connection between merchants and consumers even richer.
Schropfer said that EMV technologies, the security protocols based on tiny computers embedded in credit cards used primarily in POS devices outside the U.S., turn even a simple plastic card into a connected computer of sorts. EMV cards engage in a two-way command/response computer dialogue with POS terminals, a more secure security protocol than mag stripes common on U.S. credit cards.
Schropfer said that the ability for a credit card to "ask" and "answer" questions is important for making a more secure transaction; however, he explained the computer on the EMV card is not a communications device like a smartphone since it cannot connect to other devices or the Internet and has no interface with its user.
"The problem is that EMV requires physical contact with the POS machine," Schropfer said in his email, "which is why the customer has to 'dip' the EMV card into a slot and leave it there until the transaction is complete"
According to Schropfer, NFC solves the problem of connecting a smartphone to a POS, because with an NFC chip, the amount of data that can be sent and received, as well as what can be dynamically stored, is almost infinite.
Along with EMV transactions, Schropfer said the two-way, contactless dialogue between a smartphone and readers also opens the possibilities for how a merchant and consumer can interact during a transaction.
Schropfer believes that ability to interact, and the ability for smartphones to do more and more, will shape the way mobile payments develop. The market will move away from consumers doing the thinking to devices allowing consumers to select cheaper or better payment methods, offers and loyalty programs.
Where the money is
Schropfer said in his email that the revenue potential of new "mobile commerce" models is extraordinary, and revenue may come from some unlikely sources.
"Enabling gift cards opens substantial revenue opportunities from both breakage and interest income," Schropfer said. "Loyalty and conversion programs add further revenue potential."
"That is why neither Google Wallet nor Isis plan to make money on interchange," Schropfer explained. "These companies are not planning on being non-profits either," he said, adding, "These alternate revenue sources can keep emerging mobile commerce companies extremely healthy."
Schropfer said the evolution of mobile payments is pretty clear: Adoption of consumers and retailers are key. As the market evolves, and as devices do more thinking, the devices will provide consumers with tools that make it easier to use coupons, earn points, or even get the best discounts.
Merchants will have customer engagement tools, such as check-in posters, and possibly tender steering products that will change the way merchants advertise to their customers, even while the customer is in their store.
That doesn't mean any of this is going to happen right away, Schropfer admits, and that may be what causes some skepticism from observers.
"How long merchant and consumer adoption is going to take is the big unknown, and uncertainty makes people uncomfortable – especially those people who are responsible to make investments," Schropfer said. "But the evidence is clear: the technology works, the conveniences will be unparalleled, and the retailers will be able to build relations with their customers like never before."