Mobile payment in the States is a solution looking for a problem to solve, and the problem isn’t really there for most people.
We talked to Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion, while writing our new report, The Future of Payments & Currency. Maurer approaches the topic as a cultural anthropologist—he’s a professor of both anthropology and law at UC Irvine, where he is dean of social sciences. Maurer has particular expertise in alternative and experimental forms of money, payment and finance, and their potential to “challenge the definition and nature of money itself,” as he puts it. Currency is a “super exciting space right now,” Maurer told us, “and who would have imagined it to be so 15 years ago?” He discussed some of the disruption he’s charting, what he thinks will drive adoption of innovations like mobile wallets and bitcoin, and new consumer approaches to money and payments.
Americans have been slow to adopt the mobile wallet. Why is that?
We have an awful number of choices in payment, and most of the things we use to pay work. They are reliable, they are easy and convenient, and they’re pretty fast. So mobile payment in the States is a solution looking for a problem to solve, and the problem isn’t really there for most people.
Now when you think about Internet over mobile and new solutions for essentially what’s online payment but through the mobile channel, things start to get more interesting. There’s a lot more adoption of stuff like the PayPal app for use on eBay or iTunes over mobile than there is for any kind of mobile payment at the physical point of sale.
The other thing with mobile wallet applications is, a lot of them, frankly, stink: The user interfaces are clunky, and they don’t work reliably. I was at a big industry conference last year where a big product was being displayed by its CEO, and he went to show us how easy and convenient it is to use, and it wouldn’t work because it didn’t have a strong enough wireless signal.
The companies or the partnerships that crack the nut of their mobile wallet are going to be the ones that are find the secret to solving the physical-world point of sale. And again, that is just not a pain point for most American consumers. As an anthropologist, I can’t help but to point out that certain aspects of human behavior are extremely slow to change, and we’ve been carrying around coins since 600 B.C. These are very old technologies—it’s hard to disrupt them.
What factors might drive adoption of alternative payment systems?
There are a couple of things that happened over the past few years that present opportunities for anyone interested in a mobile wallet or some kind of alternative payment system. Those include, on the one hand, all the credit and debit card data breaches, which for a time led consumers to start using cash and still has people being a bit more cautious in feeling comfortable with using their cards everywhere. The Heartbleed thing was another blip in that space. I don’t think it affected consumer behavior much, but it was another instance in the consciousness of people in the U.S. saying, “Maybe things aren’t as safe as we thought they were when we’re doing online transactions.”
Another thing that is important to talk about: For younger people who are tech-savvy and are paying attention, especially in the wake of the global financial crisis and the Occupy movement and debates over net neutrality and so on, PayPal’s freezing the WikiLeaks account was a big thing in their consciousness that, “Hey, payment is actually political”—and that maybe there need to be alternatives that aren’t routed through traditional intermediaries in the form of banks or even some of what we might call yesterday’s disruptive players like PayPal. It’s pretty intense to me as a 40-something-year-old academic who’s been studying payment for a number of years that kids these days don’t trust PayPal.
What needs to happen before we saw mainstream adoption of new payment ideas?
Some of the innovation we’ve seen in payments that have been pretty successful are things that don’t try to change too much and just enhance at best by relying on established behaviors and tweaking technology a little bit so it looks like you’re doing the same thing you’ve always been doing. What I’m referring to is Square and the other dongle-based credit and debit swipe [devices] that can allow anybody to accept plastic via their smartphone. Those things took off because people are familiar with the physical action of swiping a card. Even though those things are basically routing the data through the audio jack and Square is operating in a way like a merchant aggregator, from the point of view of the consumer and of the merchant, it feels extremely familiar and convenient and easy, and people like things like getting an emailed receipt and so on.
Small steps have won so far. One other thing: The things that do seem to be successful in terms of migrating people off things like cash and checks and into electronic systems have been instances where you’re compelled to start dealing in some kind of digital means of payment. The two examples I can point to are government-issued payments that are done via prepaid card or by direct deposit, [and] something like going cashless on toll roads. [Drivers are] forced to start using the digital payment service. There’s pluses and minuses. There’s been controversy about some of these things because of consumer protection issues they raise. But here, anyway, the pain point just isn’t there.
In addition to new payment systems, lately we’ve seen a proliferation of alternative currencies, from hyper-local currencies to things like bitcoin.
There’s a long history of alternative currencies around the world, mainly hyper-local scrip-based systems or barter networks that involve notional currency where there isn’t actually a piece of paper that people exchange; it’s just kind of ledger ticks in a centralized database. Those things usually emerge in periods of economic uncertainty and in small, tightly knit communities where there’s a sense that if people can keep things local, then everybody can sustain themselves during tough times.
Some of what we’ve seen in the digital space has involved various types of what I would call private currency schemes, and then we have the things like bitcoin. [Private currency schemes] are mostly digital tokens or digital coupons that take a promotional form. They’re used to get people in the door, set up a customer relationship, and then try to create a closed loop so the customer is basically going to keep going back to the same website or vendor or set of services so that those businesses can lock the customer in. In some ways it’s not that different from any other loyalty scheme or old-fashioned paper coupons.
And the things tend not to function truly as an alternative currency because they are within a closed loop and are generally special-purpose. You can’t use your points with X merchant at any other merchant. Although there are now increasingly consortiums of merchants—online and offline—that are working to create pools within which these things can circulate.
These things don’t really become a regulatory concern until they pop out of their closed loop and start becoming a general-purpose currency. And that can happen when you have something like an online exchange that lets you convert points or tokens or coupons from one scheme into points or coupons for another scheme, or that lets you convert your points of whatever form into cash. When that happens, you are a money transmitter; you need to be licensed in all the states that require licensing. So that sets a high barrier to entry for having a general-purpose private currency. But we do see some startups and established players playing around with that idea.
What’s the incentive to create private currencies?
These things aren’t really put out there to be about money and payment but more to be about big data-type marketing and advertising schemes. If you can lock people in to a set of relationships with specific vendors using loyalty and whatever, ultimately you’re going to be getting more and better data about those customers. Which you can use to push products to them or, more likely, sell to somebody else, like Acxiom or Google.
There’s an interesting thing where historically, the payment industry was about collecting a fee for the service of providing a digital rail or an electronic rail to get money from A to B. Payment is increasingly more and more about advertising, about marketing. And I’ve heard people say, “If you’re in the payment industry and you’re not yet in marketing, you should get ready, because that’s where your business is going.”
What does that mean for traditional credit card companies?
That’s a hard thing for [companies] like Visa and MasterCard to get their head around. For the traditional payment players that have thought of themselves as rails for transiting value, all of a sudden also being a portal into consumer preference and behavior is a tough thing. Part of the reason is historical. When the card network was set up by the banks, there was a struggle for control of the customer between the banks and big merchants, and there still is. Basically [they] were fighting over who was going to have the total picture of the customer. The supermarket knows what I bought down into detail, but it’s only able to capture that data if I give them a loyalty card, whereas MasterCard knows I went to that supermarket but doesn’t know all the items I bought.
Increasingly, you’re seeing payment companies wanting to bridge that divide, where you get both the payment data and the actual purchasing data. Certainly with Square or some of the other payment startups that we see emerging, that’s the name of the game: both doing the payment relationship and the customer relationship management.
You see really specialized things out there—there’s a payment company that helps with the payment and inventory for wine tasting rooms, and they’ve got their own dongle that goes into your iPad or whatever. And there’s a lot of data sharing to figure out: “What does this particular customer want when they’re shopping for wine, and how can we push them offers that will get them back to this consortium of wineries?”
And then what potential do you think bitcoin has?
What’s interesting about things like bitcoin is less the potential it has as a currency and more the potential it has as a new payment system—as an alternative payment rail, so to speak, that operates using different protocols, that has different kinds of security built into it, that has some of the advantages and disadvantages of cash in that it’s a push payment: Once I send it, I can’t call it back.
One of the things we’ve been paying attention to very closely is the work being done in the bitcoin protocol to layer things on top of it that look more and more like the kind of authentication and opportunity for arbitration you have built into the card networks. We see this not so much being a currency but being added into the ecology of payment systems, where it can probably serve a couple of important functions.
The things I’ve been watching that look pretty interesting—and I don’t know if they’re going to go anywhere, but the technique is interesting—is the use of bitcoin as a way to do trans-boundary remittances. There’s a couple of services that operate in Kenya that let you send money from like England to Nairobi through a bitcoin interchange. The funds can then be deposited directly into your mobile money account, your M-Pesa account. They’re avoiding all the problems that come from using the traditional international wire services. You’re still going to have issues around settlement time and around processing fees, but we’ll have to wait and see what happens with that.
To me, a key thing to watch specifically with bitcoin is, as the maximum cap of bitcoin ever to be mined gets closer and closer to being reached—that 21 million bitcoin cap—and mining activity slows, there is likely to be a transition from the people who consider themselves miners and are rewarded for that activity. It’s a lot cooler to be a miner than it is to be a transaction processor. Over time we’ll see some folks in the system drop away, and other folks adopting a more standard payments-industry model.
When I look at something like Coinbase, the pitch to a merchant about why I should be using bitcoin as a payment system at the point of sale or online, it’s not about, “This is this cool, anarchist, decentralized currency that will revolutionize society forever.” In the community of people using bitcoin, this is quite controversial still, but it seems the currency side of the argument may be receding and the payment side is coming to the floor.
What would regulation mean for bitcoin?
I think it’s going to encourage more people who have experience with the payments industry. The FinCEN ruling … [it] may have thrown some cold water on some of the exuberance, but then it also made people realize, “If we’re going to do this, we have to enter the world.” And then some people started to say, “If we think of ourselves not as an alternative to the U.S. dollar but as an alternative to the Visa network, there’s probably some money to be made.” That’s one of the things that’s been happening recently.
There’s a degree of uncertainty because of regulatory uncertainty, but I don’t think at the end it’s going to be a thing that squashes it all. There is probably enough momentum behind some of these new entrants modeling themselves on payments businesses that those are going to gain some traction.
There are also these companies looking at alternative uses of the blockchain that’s the backbone of bitcoin, and those are pretty interesting. Something like Ethereum, Ripple—which is still in payments, but there are other possibilities there—or Monegraph, which is creating provenance for digital works of art. These are playing around with other uses for blockchain databases, where you want to use the blockchain instead of a trusted third party and eliminate that third party. Stepping outside the domain of money and payment for a minute, I think we’re going to see more experiments with what else you can do with the blockchain besides transit value.
For brands accepting cryptocurrency like bitcoin, is it still more beneficial to use a middleman that collects the bitcoin and exchanges it for fiat currency?
It’s absolutely safer for the brand to be using another service. From the point of view of a brand, saying you accept bitcoin instantly gets you a media hit, instantly gives you a bit of a sheen of being tech-savvy, cutting-edge and maybe just a little dangerous but in a hip way. But I don’t think you want to be doing it yourself; you want to be using a third-party service.
Has the advent of these novel forms of payment changed perceptions of money, or is it seen as, “Money is money”?
It’s still basically “Money is money.” But all the events since the financial crisis, which co-occurs with the explosion of new payment options and interest in new kinds of moneys, brings to the fore for people that money is always only a human creation, kind of a collective illusion. It’s something we invent as societies and states and communities, and we can reinvent it if we want to. There’s been this destabilization around perceptions of money and new openness to the idea that money is something we can craft anew. This has happened from time to time in history, and this is one of those moments where it’s happening again.
Are there any ways in which consumers have significantly changed their behavior already when it comes to payments? What about Millennials?
One payment system seems to be fading away, and that’s the paper check. What’s interesting to think about is how banks are going to continue to hold their clients in a period where people are not invested in their bank brand. Banks aren’t giving them interest and are seen as bad institutions and also bad players in the financial system, in some sense, even though at the end of the day banks are more highly regulated and safer than just about anything else you could be doing with your money. Banks have a particular challenge right now.
The other thing we’ve seen with the financial crisis is less and less emphasis on credit and more on debit. Younger people are almost exclusively using debit so that they feel they have more control over their money. It speaks to a growing generation that’s interested in both access and control. The thing with debit is, you feel like you have a certain degree of control over it because it’s a set pool of money you’re drawing out of, the end, and there’s nothing else going on.
We see a number of banks and credit unions and startups playing in the space of user interfaces and applications that give insight into your spending or what’s happening in your bank account, so that from your phone you can see, “If I buy this, then I’m not going to be able to buy that later.” Or, “If I buy this, then I’m going to be over budget for the month and won’t be able to pay my rent.” With those kinds of financial management apps or visualization tools that are tied to debit or even prepaid cards, there’s probably some opportunity there. Because you now have a whole generation who are interested in that, who are comfortable with that, who are familiar with doing things on their phone and expect their mobile device to give them nice-looking data they can interact with, and it helps them feel more in control of their money.
Aside from Millennials, there any other demographics, markets or areas that are open to new forms and methods of payment?
Yes, definitely. The un- and underbanked traditionally haven’t been served by traditional banking institutions. They’re the ones who are going to check-cashing outlets and pawn shops. They’re the ones where there really are pain points associated with checks and cash, for whom prepaid cards or prepaid wallets on a phone might actually be very attractive. The downside is that a lot of the services for that market segment in the digital space—in this country, anyway—often are coming with hefty fees. But definitely the un- and underbanked in this country are a big potential market for alternative payment and banking services. That’s pretty exciting I think.
What brands have started to move into the financial space that have not traditionally existed there before?
Merchants are getting a lot more interested in payment directly. You also have entities like airtime distributors—the companies that manage phone prepayment services, the distribution of the scratcher cards that people buy at convenience stores to top up their phone. Those airtime distributors have realized that they’re sitting on a payment service and are thinking, “Can airtime be something more than airtime?” Similarly, the other interesting one in the mobile space is the carrier-billing companies that now can do pay-at-the-point-of-sale and bill directly to your phone, a company like Boku.
Some of the IT companies are now thinking about payment more. Here it is again: payment as a means to marketing—not payment as a means to value transfer in itself—or banking as a portal into consumer behavior and preference that then gives you more data for marketing or product placement or even product development.
The payment infrastructure is pretty fragmented. Do you see any consolidation or streamlining?
The question there is, how many new payment rails do we need and how many can we have before things get crazy? From a consumer point of view, having lots of closed-loop payment systems that are only connected through expensive gateways is not a particularly attractive proposition. That would argue in favor of consolidation or a continuation of the six or seven core payment systems we have now: the debit rails, the credit rails, the ACH, the wire services, cash, etc. If you get a mobile network or mobile consortium together with an Apple or a Google, then maybe something interesting and different can happen.
The brilliance of the card networks is the way they create this effect for a consumer and for merchants of accessibility anywhere, 24 hours a day, any card, any merchant. And that’s really great. If I have to use this kind of money or this kind of payment service for that store, that gets irritating. That said, people already do this, and navigate it quite well, in the space of gift cards or now mobile gift cards. I think there’s a generational thing there, too.
To wrap up, what’s your overall outlook for the future of currency?
It’s a super exciting space right now, and who would have imagined it to be so 15 years ago? There’s been such incredible innovation in payment and in money; there’s so much going on. We haven’t even touched on the cash cycle and what the governments and companies that make paper bills are doing—some of them are reimagining themselves no longer as a bank note company but as a security and encryption company, for instance, like G+D in Europe.
There’s a lot of disruption taking place. At the same time, we still haven’t really seen anything radically, radically new. We’ve seen a lot that rides the existing rails or creates new consumer-facing portals into those rails, that offers the consumer additional value—in theory, anyway—in the form of offers or coupons or customer relationship management or just a cool experience. And that can’t be undersold either—having a cool experience is a nice thing, and people like it if there’s something fun about parting with your money; makes it easier to see it go away.
We’re in for a lot more of this as more and more traditional players and new companies jump into the fray. We’ll probably see some colossal failures. We’ll see some things fade quietly into the night; we’ve already seen some of those. It’s a very exciting space. Folks across a number of sectors ought to be paying attention to payments right now.