What's the Holdup On Mobile Payments?

There are many big players in the digital wallet space, and all of them are working on a version of the smartphone-based mobile wallet. Yet for all the technical know-how and industry clout being spent on it, mobile payments have yet to experience explosive growth – so what is holding back mobile payments?

 

Industry research and pilot rollouts indicate that people are more likely to use a smartphone for low-value payments, defined as $20 or under, simply because of the convenience. When going out to walk the dog, people are likely to grab a cell phone – and somewhere along the way stop and buy a newspaper or a coffee. Paying for a mobile device avoids having to fish for change. Therefore, if the digital wallet is to catch on, the ability to conduct small transactions on one's smartphone becomes increasingly important. 

 

The problem is that the cost structure around these small transactions is so prohibitively high that it discourages merchants from accepting electronic payment – including mobile wallet. When spending on a card, whether its five dollars or a thousand, the same number of steps needs to take place to process the transaction, from the POS terminal through several layers of authorization, clearing and settlement. All of the participants in the system need to be paid for the service they provide toward making that electronic payment happen.

 

Looking a little further, all mobile wallets currently use the same debit and credit cards as the underlying method of payment. So the smartphone merely adds another layer of complexity to the payment scheme – more middlemen who enable the transaction needing to be compensated, as the transaction runs its course.

 

So, to make mobile payments more affordable across the payments ecosystem from merchant to issuer – leading to increased consumer use of the mobile payment capacity – the answer is to bring down transaction-processing costs across the transaction value chain. A technology that achieves this could completely overhaul the economics of the current business model for low value payments by providing a positive business case for all the stakeholders. 

 

 

The consumer can then spend that digital balance, making small purchases at multiple retailers. These transactions are never processed individually through the payments system. Instead, on the merchant acquirer side, all those low value transactions are aggregated, and settled with the acquirer bank at the end of each business day.

 

As a result, a low value payment transaction carries only a fraction of the processing cost of the original withdrawal transaction. With the overall cost reduced by an order of magnitude, every party in the transaction value chain can benefit.

 

Cash has historically been used for smaller everyday transactions. For the mobile wallet to take off, it needs to include a payment method that displaces the cash function of our real wallet. Mobile devices combined with this new functionality, suddenly makes mobile payment forms much more attractive when making these everyday low-value transactions. All parties in the payments ecosystem stand to gain, and the digital wallet is now positioned to capture a good portion of the enormous number of small payments still made every day in cash.