Mobile wallet adoption has been slow is because our existing payment infrastructure is so good from a consumer standpoint.
While researching our latest report, “The Future of Payments & Currency,” we spoke with payments expert Deborah Baxley of Capgemini Financial Services. Baxley has consulted on strategy for payment companies across 14 countries and serves as secretary of the Smart Card Alliance Payments Council. She discussed whether cash and checks have a future, what’s impeded the mobile wallet and what will trigger its adoption, which sectors are opening up to new ways to pay, and the impact of Apple Pay, which she sees as a tipping point for mobile payment.
Americans and many other consumers have been slow to adopt the mobile wallet. Why do you think that is?
This is a question a lot of people have been asking lately. The reason mobile wallet adoption has been slow is because our existing payment infrastructure is so good from a consumer standpoint. I know there’s been a lot of hacking, and there’s increasing problems with fraud, but that doesn’t really impact the consumers. The issuers, the banks, have done a very good job of reassuring people that they’re not responsible for transactions on their card if it’s stolen or hacked.
There have been times in the past few years where banks have tried to introduce things like a contactless card, but then they made it so the swiping of a mag[netic] stripe worked just as a fast and just as cheap to the merchant as a contactless card. Most people don’t know the difference. They don’t even know the contactless card is there, and they don’t use it because the swipe is just as fast as the tap. That’s when I say, “The good is the enemy of the better.” Consumers don’t have a big reason to switch from using the swipe.
Of the mobile payments that have gained adoption, the most common and famous one is the Starbucks [app]. The reason is, they made the checkout transaction very quick if you use the Starbucks wallet; It’s quicker than paying with cash, which is what most people would pay for coffee with instead of with a credit card. But they also tied in the loyalty card. It provides an incentive to use the app because you get free coffee eventually. That one has been by far the most successful.
In countries where mobile payments have gained adoption, like in Kenya, they were solving a huge problem. Because people had cash, they were being robbed on the highway when they were trying to send money back to their villages. The most common way to send money back to a village was via bus, believe it or not. You’d give the money to the bus driver, and they would drive several hours over an unpaved road and drop the money off to your wife or parents or whomever in your village. And that was just a horrible, horrible system.
In that case, mobile financial services made a huge difference. Whereas for us, in most developed markets, it’s making a tiny difference. Nobody’s quite cracked the nut on how to make a big enough difference to drive behavioral change in consumers. That’s why it hasn’t been wildly successful.
Which industries or business sectors have been especially open to adopting new payment technologies? For instance, fast food restaurants?
The ones you mentioned, we call quick service restaurants, QSR, that’s the fast food segment—all they really care about is speed of transaction. As long as it’s fast, they’ll do it. There are other retail segments like Walmart and Best Buy that are very sensitive to the cost of payment acceptance, because it’s a pretty big expense for them to accept credit cards. They’re the ones who have been behind a lot of these interchange lawsuits.
The main thing they’re looking at is a cheaper cost, and of course they also want it to be really fast—you can’t spend too many seconds at the point of sale—but they’re looking to lower their cost of payment acceptance.
Then there are others like Jamba Juice, one of the earlier adopters of the PayPal wallet, where they had “order ahead.” You would go into their app and order your juice, and when you showed up at the store, it would be sitting there on the counter for you, and you didn’t have to wait in line. The problem they were trying to solve was people standing in line for a long time waiting to place their order.
Each retailer in each segment has a different driver, a different problem they’re trying to solve. One that is really exciting is OpenTable. OpenTable is going to embed Apple Pay into their app. That’s a pretty big change to their business model. Not only will you make the reservation, but when you’re at the restaurant, instead of having to wait for our silly process—where they bring the check, you give them the credit card, they bring it back and then you sign it—paying for your restaurant bill can all be done in the OpenTable app. That makes it a lot more convenient, more secure, because you’re not handing a card over to a server. It’s also a value-add to the restaurants.
What effect will Apple Pay have on pushing mobile payments? Will it popularize payments with wearables, since it can be used with the upcoming Apple watch?
The introduction of Apple Pay has completely changed the landscape and kind of legitimized NFC. Apple has a reputation for waiting until a technology is a little bit more mature and then doing it absolutely right, and then causing the whole ecosystem to reach the tipping point. They’ve done this over and over again with smartphones and so forth.
NFC’s not new, but everyone has been waiting for Apple. A lot of people thought they would never introduce it, that they would bypass it with Bluetooth Low Energy. But now that they’ve announced NFC, they’ve done it the right way. They’re not trying to circumvent the banks. They’re not trying to monetize the data like Google Wallet did. They did it in the most secure way, the most secure implementation we’ve seen to date using the fingerprint authentication of the user. And they also spent a lot of time getting all their ducks in a row, meaning getting Visa, MasterCard and the banks bought in, engaged and agreeing to how this new ecosystem should work with the tokenization and the biometric authentication. They’ve done a beautiful job.
Even though they don’t have as big a market share in smartphones as maybe Samsung does—and Samsung has been putting NFC in their phones for a couple of years now—it’s taken Apple making this announcement to really legitimize the whole thing. I really think we’ve reached a tipping point now for mobile payments.
What is your view on bitcoin as both a payment system and a currency? Will technologies like the mobile wallet help to legitimize bitcoin by enabling people to purchase with it in person?
I don’t know about the connection so much between the mobile wallet and the virtual currency. I do think virtual currency—it may or may not be bitcoin—is a technology that solves a commerce friction problem. And as in any case where you’ve got friction and commerce, it’s going to work eventually.
One of the biggest use cases I see for bitcoin is cross-border e-commerce. Now the way it works is, you have to pay banks quite a big fee to do foreign currency exchange. If I’m trying to buy something from an artisan, say someplace in Africa, how am I going to do that? It would be a pretty difficult transaction to process. I had a case earlier this year where I went to Kenya for a safari, and for some reason they don’t take credit cards. The whole cost of the safari has to be paid upfront. What they make you do is a wire transfer, which is horribly inconvenient and very expensive, and it’s a big pain. In the future, if you can pay with bitcoin, that erases all the friction in the commerce. That’s why I think it’s going to happen eventually.
Also, there will be eventually a demise of state-backed currencies. Not all of them, but it’s gotten to the point now where Iceland doesn’t have its own currency anymore. There are a lot of countries that could eliminate their currencies and start using something as a proxy.
What countries do you think would be most open to that? Some cite Argentina as a nation that would benefit from adopting bitcoin due to the instability of its currency.
Bitcoin is a little bit too immature right now for anyone to take that as a serious proposition. But the examples I’ve heard are like Iceland, really tiny countries where the cost of maintaining their own currency is prohibitive. Of course, they can’t manipulate their own currency, either in a good way or a bad way, when we have financial downturns. They give away that, but everybody who joined the euro also gave away that privilege.
In addition to Apple, what brands have moved into the financial space that have not traditionally existed there?
PayPal is the poster child of that, being a disrupter nonfinancial-services entity that’s made great strides in the payment arena. Apple is interesting because they called it Apple Pay, but they’re not operating a payment system. They’re doing the user authentication, and they’re sewing together the pieces of the ecosystem, but they’re letting the traditional players—the banks, Visa, MasterCard—do their thing. So I wouldn’t say Apple has gotten into the payment space.
There’s been a lot of supposition about what Amazon might do because they have a pretty cool thing: Amazon 1-Click. If they wanted to, they could take that out, as PayPal has, to bricks-and-mortar or to other e-commerce sites and make that a new payment system.
The phone companies are the other big category. In the U.S. market, you’ve got Softcard, [formerly] Isis, that was formed by the phone companies. However, in Kenya, the most popular mobile financial services system in the world, M-Pesa, is operated by the phone company with no bank involvement whatsoever. They got permission from the regulators, but it’s not interest-bearing. They sidestep anything that would make them seem like a bank, yet they’re operating a financial services system.
What parts of the current fragmented payment infrastructure do you see becoming obsolete, and what will remain?
In a way, mobile technology makes it even easier for more fragmentation, because in your mobile wallet and through the cloud, there can be instantaneous translation between anything and anything. You could use airtime minutes, loyalty points—anything could become a currency. It gets translated to the recipient in the cloud. I’d say fragmentation will probably increase when it comes to the means of value exchange.
On the other hand, at some point, the payment acceptance forms will have to settle down to a fewer number. We’ve got a lot of experimentation going on right now with QR codes. You’ve got Dwolla and the new wallet that’s being formed by the really big retailers—Best Buy, Walmart, a whole bunch of restaurants—called CurrentC. Their company is called MCX, Merchant Customer Exchange.
For the competing wallets, we have four major ones and a whole bunch of minor ones. I don’t think people are going to want to have 10 different wallets on their phone. There will be fewer—probably not one but a handful of wallets people will use.
As far as checks, the ironic thing is that the thing where you can take a picture of a check and make a deposit, that’s almost breathed new life into checks, inadvertently. There’s going to be a very long tail in checks. It’s going to take a long time before they totally disappear.
There’s a recent survey from Bankrate.com that found 63% of American Millennials don’t have a credit card. What do you make of this, and what does it mean for the future of payments?
With the Dodd-Frank Act, the Durbin Amendment fixed interchange rates for debit cards in the U.S. at a very low level, which has made them unprofitable for banks, and credit cards are very profitable. So there will be a lot of attempts to get Millennials to get credit cards. Of course, you should use them responsibly and also for the reason of building up credit. Because in the future, if you want to buy a car or a house, you need to have developed a credit score. You’re not going to get that from using a debit card. There will be some creative incentives applied to Millennials to get them to use credit cards.
With the advent of novel forms of payment, has it changed people’s relationship with money in any discernable way? For example, does it change spending patterns or behavior?
There’s a rule of thumb in the industry—and this was most recently talked about with McDonald’s—when people switch from cash to cards, they spend 10 percent to 15 percent more. The reason is because you don’t have to worry that you’re going to run out of cash in your wallet. And you’ve kind of lost touch with the actual physical currency. It seems a bit more disembodied or virtual when you’re spending with a credit card. I think that’s one kind of relationship.
Also, people have different buckets in their head when they want to use credit cards versus debit cards. I have a friend who refuses to use a credit card to buy groceries because she says it makes her feel like she’s financing her food, and she doesn’t think that’s right. That doesn’t really make any sense if you pay off your credit card at the end of each the month. But people have these different preconceived notions about how they want to segregate their purchases.
What markets are seeing the biggest changes?
I’d say China. I did a lot of work in China 10 years ago, which is like a million years ago compared to how far they’ve come since then. Everybody in China, almost everybody, has a bank account. It is a highly banked population. But 10 years ago, credit cards were unknown. Since then it’s grown exponentially. And now you’ve got Alipay, which is a spinoff from Alibaba, which created a whole new capability. It’s a bit different than PayPal because it uses the assuredness where the money’s put into escrow until you actually receive your item.
The average Chinese consumer doesn’t trust the e-commerce website. In the same way we wouldn’t trust the other person on eBay, they wouldn’t trust Amazon. That’s the way Alipay works. It puts the money in escrow until you receive your item, so it provides some assuredness. Even though Alipay only has half the market, everything is big in China. It’s just so huge—the number of people, the number of transactions, the amount of money—and it’s at the very beginning. Except in the big cities or where tourists go—hotels, restaurants and stuff like that—almost all merchants are still cash. They’ve got a huge leap that they’ll be making in putting point of sale, whether it turns out to be mobile phones or whatever it is, into all these other stores and driving up the use of electronic payments.
Are there any markets that might be particularly open to new forms and methods of payment?
I mentioned Kenya, and I think the rest of Africa has that same issue. For whatever reason, in a lot of cases, the bank regulators haven’t been as friendly as they were in Kenya, because they are trying to protect their banks. But it’s a continent that’s crying out for a better solution for sending money to other people in other parts of their country to prevent robbery, to prevent skimming.
There was one example—I forget what country it was—where they started paying the police force using a mobile wallet instead of their bosses handing out cash every Friday. The police all thought they suddenly got a 30 percent raise, because the money in their wallet was much higher than they had originally been getting. It turns out the guy handing out the cash was taking his share every week. Electronification of payments in every way can change people’s lives in Africa. It’s really calling out for that as a solution.
Are there any noticeable generational differences when it comes to using forms of payment?
It’s quite obvious that depending on the person’s age is how comfortable they are with trying new technology. Generally, people my age would not be as comfortable using mobile payments. The first question I always get when I describe what I do to people is, “Well, what happens if you lose your phone?” Well, what happens if you lose your credit cards? You can’t turn off your credit card remotely, whereas you can disable your phone, and the phone has more security in it. There are definitely generational differences.
What do you think it would take for the older generations to be more open to a mobile wallet?
The biggest concern is always security when they do the surveys on “Would you use it, and if not, why not?” So it has to be a public relations campaign on how much more secure mobile payments are than mag stripe. It’s ridiculous how unsecure our mag stripe infrastructure is. And the banks don’t want to emphasize it because they don’t want to say our cards are not secure—they don’t want to trash their existing product. On the other hand, you could emphasize over and over again how much better mobile- and chip-based technology is versus what we’ve currently got.
Overall, what’s your outlook for the future of currency and payments?
Ultimately, I think there will be a very long tail for currency, but it’s kind of like checks. There are so many disadvantages to currency, and one of the major beneficiaries of cash is criminals. Nobody really uses $100 bills except criminals. I don’t even know why we have $100 and larger bills.
There are just so many advantages to going electronic, including the germs on cash, the cost it takes to manufacture the cash, to print it and secure it, and then to recycle it. It’s just a very old-fashioned thing. It’s going to take probably hundreds of years to totally eliminate cash, but I think, as with checks, we’ll see a gradual decline in the use of cash in favor of all these alternatives. It doesn’t really matter what the alternative is: It could be credit cards, it could be debit, it could be direct debit from checking accounts, it could be airtime minutes, it could be loyalty points, it could be bitcoins. It could be anything. In the future, it’s a cloud. They’re all interoperable with each other.
Any other thoughts you’d like to add?
One of the things I’ve looked at—I wrote a blog post about it—is what things will make mobile payment successful. It has to be a lot better than the current ways in order to change consumer behavior. It has to make for faster checkout, like the example of Amazon 1-Click. That’s e-commerce, but instead of typing in a whole credit card number onto your phone, you just hit that one button. Apple Pay will be the same way.
Another one is eliminating friction. The example I gave of the PayPal order-ahead at Jamba Juice eliminates friction because you don’t have to stand in line.
And the third one, which is probably more unique and a little more futuristic, is enabling marketplace. In the same way that PayPal addressed the issue of eBay, there are a lot more marketplaces coming up. One of the coolest ones is Uber. Uber enables a marketplace in every way you can imagine because it gives you reputations and ratings. It scores drivers on how timely and how clean their car is. It makes it more convenient for you to order a car service. You don’t have to worry about whether you have cash or not, and payment is embedded in the whole experience. It’s just part of enabling marketplace. There are going to be other examples of marketplaces at a smaller scale than eBay that are going to help change our everyday lives.