Just before the 4th of July holiday, Felix Salmon, finance blogger at Reuters, wrote an insightful piece, sharply critical of mobile payments and the long anticipated ability of our clever smartphones and wireless communications to improve upon a simple plastic payment card. It’s hard to argue with much of his critique.

Salmon’s piece set off some discussion here at Glenbrook about the status of mobile payments and the conditions necessary to effect that shift from plastic to smartphone. Here are some thoughts.

A Step, Not a Destination

“Mobile payments,” hailed as a watershed opportunity to displace the card brands by some, has exerted strong gravitational attraction on telcos, merchants, payments outsiders and, to a lesser extent, financial institutions.  It’s turned out, of course, that that’s been a lot harder than anticipated.

My view is that the intense focus on mobile payments has obscured the real goal. It’s really not about payments. Commerce is the point. Whether it’s creating more sales, increasing ticket size, or just cementing a customer relationship through personalization and deep convenience, the mobile interaction has to be richer than a simple card swipe for the proposition to take off with merchants and consumers. Doh.

Put another way, if we enjoy the simplicity of cards, why replace them?  They work well and will be with us, no matter what happens, for a decade or more because merchants won’t adopt mobile payments until a critical mass of consumers are ready to pay with their phones day in and day out.  There must be a meaningful consumer value add, too.

At Glenbrook, we’ve been talking about payments increasingly as an embedded, even an invisible, step in what we’ve called a smart transaction. Such seamless embedding of the payment itself seems to be a prerequisite for “mobile payments” to take off.  We’re just not there yet.

Salmon’s critique has some merits when it comes to today’s mobile payments. But we have seen that, when it hits the mark, it’s a hit out of the park.  While he’s “curiously self-conscious” about a “newfangled mobile payment technique” there are some ten million active mobile Starbucks customers who have no such reticence and are happily making mobile payments and checking their rewards point balances (I just checked mine and discovered I’ve got a free birthday drink waiting for me).  With those numbers, how is that a not a runaway success?

Another, perhaps less certain success is LevelUp.  The company claims one million users who find its service convenient (count me among them—one tap on the app and you’re ready to pay) and over 5,000 merchants using its service.  That may be far smaller than the 13,000 Starbucks stores but it’s a start.  Its partnership with Heartland Payment Systems, the processor for 10% of US restaurants and 50,000 convenience stores, should help expand that merchant footprint.  What’s not to like about that?

These examples may be the first instances of mobile payments at scale.   (Despite Square Wallet, Square’s success is primarily based on mobile payment acceptance, not initiation).  Each also possesses smarts that go beyond the payment in the form of loyalty and rewards.

Over on the commerce side, the real point of it all, we’re just beginning to see transaction flows that embed the payment, optimize transaction functions, and make the commerce experience valuable to both merchants and consumers.

PayPal strikes me as the furthest along in combining payments and commerce. It’s been demoing various combinations for a couple of years but they’re still not operating at large scale in point of sale retail. Square’s Wallet is attempting to play on both sides of the transaction, too, but its success to date in that mode is modest.

But both PayPal and Square see the convergence of point of interaction commerce glowing in your mobile device.  That’s why both companies are applying considerable resources toward next generation commerce capabilities, with both consumer and merchant value-add in mind. They are among the most focused and well-funded firms in an increasingly crowded field. And, still, the mobile commerce tipping point is nowhere in sight

That tells me this stuff is hard. Building compelling smart transactions for merchants and customers takes significant integration, piloting and support. It’s a challenging human factors and design problem to combine required transaction details and database lookups (if needed) into a seamless purchase and checkout process on such a small form factor. These innovators, and others, have to learn from experience and they haven’t had much road time yet.

Now, layer that customer experience design challenge onto the payments industry’s renowned complexities as well as its powerful immune system against new ways of moving money. It’s no wonder mobile payments are taking time to blossom.

Mobile Money Services Aren’t Mobile Payments

We need to draw a distinct line between the mobile money services of developing economies and our developed world, smartphone-powered conceptions. They are wholly different domains, at least for the time being. Yes, the MNOs, PSPs, and banks sponsoring efforts like M-PESA are in a position to extract fees that appear outrageous from our perspective. But they are very different in profound ways: mobile money services are, at once, providing banking equivalent services—where there were none before—as well as the rails for electronic payments where infrastructure has lagged. Holding up the cost side of the equation against the nation building impact of a de novo financial services infrastructure—built on mobile communications—is off the mark.

A Couple of Enabling Technologies Short of a Platform

So, what’s it going to take to make mobile commerce happen? What key elements are required to really bring mobile commerce to life?

1. Wallet in the Cloud

First, a cloud-based wallet has to be in place, where the true payment credential and its linkage to an accountholder token is maintained on a network server. That token needs to be addressable via an entity—or two—with wide market coverage or perhaps a directory-based approach could emerge. The Clearing House’s recent Secure Cloud announcement may be an avenue, especially for the largest banks that appear to be exploring new rails for consumer payments.

2. Federated Authentication

Second, authentication functions need to be federated. Authentication today is highly silo’d which increases cost. Federation could lower that cost. User authentication is a natural application of our mobile devices. Once we can demonstrate card holder presence, then we have something that is, from a risk point of view, at least midway between today’s increasingly obsolete card present / card not present dichotomy.

If the FIDO Alliance and its horizontal approaches to biometrics (fingerprint and voice) gains traction, then we’re better off than card present by a long way. That’s why I watch this part of the technology evolution so closely. A fee-based exchange of transaction-specific attributes among the parties to a transaction is an enabling function that will move mobile commerce forward. Well executed, it should improve—rather than degrade further—our ability to manage privacy online.

3. Implementation Flexibility

Third, flexibility at the POS will be required. Merchants are going to need devices capable of accepting EMV cards, reading QR codes, and accepting NFC taps for a payment or for a customer check-in. Maybe they’ll also need Bluetooth Low Energy. Approaches like the Genius multi-method payment device from Merchant Warehouse are designed for this transition period where cards alone won’t suffice and, despite the hopes of many industry incumbents, NFC won’t be the only approach at the POS. Yes, all of this will add cost to the merchant’s POS infrastructure but if it truly enables commerce and not just payments then the investment should be worthwhile.

4. Payment Rails

Last, and perhaps most contentious, payment rails are required to move value.  We have card brand rails.  EFT network rails are another set.  The ACH provides another avenue. Thee are application-specific networks that provide, for example, P2P functionality.  And there is even the potential for crypto-currencies to provide a very different mode of value transport.  While each option is modulated by competitive strength, rules and regulations, technology, cost, and risk, there are more options than ever before.

With these four elements in place, new partnerships and alliances are possible. The MCX is an example.  It has taken advantage of its wallet in the cloud concept through its partnership with Gemalto, a firm that is, no doubt, providing authentication services to the initiative as well as POS implementation flexibility.  Couple that to the recent FIS partnership that reaches most of the DDAs in the US and the MCX now has no small amount of opportunity to serve a very large base of customers.

Time for the Trough of Disillusionment?

In the meantime, those waiting for mobile payment ubiquity will need one more element: patience. As Salmon’s blog indicates, there’s going to be a lot of “where’s my mobile payments?” criticism surfacing. NFC’s meandering is a contributor to the problem and a proof point for the naysayers. Between limited NFC handset availability, Google Wallet’s NFC confinement to Sprint-issued phones, and the limited two city pilot program of Isis, reaching just 1580 merchants, the NFC payments reality has not met the high expectations.

We can all agree that the simple duplication of the card experience sets a very low bar. And we’ve all seen that accomplishing even that modest goal is no easy task. For some, it will be time for the trough of disillusionment with mobile payments.  For many others, we are in an exciting era of innovation, experimentation, and challenge, especially for incumbents, because the goal is personalized, deeply convenient transactions, not the limited notions most payments industry participants understand. We want smart transactions (and self-driving cars!). And those are going to take more time.

We want to see smart transactions happen as much as you do.  If you want to shorten that time period and expand what’s possible for your mobile payment and commerce initiative, give us a call to discuss how we can move toward that goal.