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Don't Throw In the Towel on Mobile Yet

posted by Adam Levitin

Felix Salmon has an interesting and provocative piece arguing Why Mobile Payments Will Never Take Off. The problem, Felix observes, is that none of the mobile payment systems around really offer any improved convenience over plastic. (Indeed, one might note that depending on the setting, cash is still the fastest, especially if security procedures for plastic, such as checking to see that a card is signed, are followed.)  Felix also observes that the developing world examples of successful mobile payment systems, like M-Pesa, don't really present a model for the US.  In the developing world, mobile payments represent the Great Leap Forward, bypassing the age of retail banking and plastic cards, and going straight from paper/barter to digital. If the contest is mobile vs. paper/barter, the outcome is likely to be different from mobile vs. plastic.  Felix is right on both points. Still, I'm not as ready as he is to throw in the towel on mobile.

To make a payment platform work, there needs to be a consumer and a merchant value proposition sufficient to motivate usage from both.  Mobile's consumer value proposition isn't going to be convenience per se.  It is going to be integration of payments with other streams of information: discounts and special offers, frequent buyer rewards, etc.  The payment may not be faster, but there is a benefit to being able to combine all of those different cards that may or may not be in your wallet into one place.  And to the degree that early mobile adapters are likely to be higher spenders, there might be some ability to cross-subsidize them (regressively) from other consumers. The value proposition for merchants is going to have to be some combination of lower costs and consumer data, but maybe some merchants think mobile rewards/loyalty programs will increase sales.  

So far, no one seems to have found quite the winning combo of consumer and merchant value propositions and technology. Part of the trick may be that the formula does not work unless its done to scale, and that presents a chicken-and-egg problem. Another problem might be the economic structure of mobile payment systems. Simply put, there may be too many mouths to feed.

Let's suppose that a mobile payment system has a value of X greater than plastic in the form of consumer and merchant and systemic (e.g., anti-fraud) benefits.  If the various stakeholders in the mobile system are demanding revenue streams that are greater than X, the system won't work. This could well happen as X is not a clear dollar amount, but there are a lot of potential mouths in any mobile ecosytem:  OS developers, app developers, device manufacturers, telecoms, banks, payment networks.  All of them are quite sensibly out trying to get the best deal for themselves.  But in the process, they may erode the value available for consumers and merchants to the point that the systems are not attractive. What we have is sort of a pre-emptive tragedy of the commons in an overgrazing of a shared plot that isn't yet in existence. 


"So far, no one seems to have found quite the winning combo of consumer and merchant value propositions and technology."

Because changes in payment systems traditionally have not really been for the benefit of individuals and merchants. They're mostly for the benefit of the intermediaries who skim off the transaction fees. Those parties have no interest in making a winning proposition for anyone but themselves. The purpose of making transactions faster and more convenient is to allow more transactions and hence generate more fees. I.e., the goal is to get the individual to part with more money than they would otherwise. From an individual convenience perspective, plastic is the "good enough" solution. Maybe a mobile payment is slightly faster, but so what? The downside, as you say, is that mobile allows even closer tracking by the merchant (and others down the line) and even more opportunities for aggressive targeted marketing than before. What real value is that for the individual?

"...a pre-emptive tragedy of the commons in an overgrazing of a shared plot that isn't yet in existence."

a delightful, archetypal metaphor.

Why are we looking to the private sector for this develoment? Isn't this supposed to be a true substitute for cash? Shouldn't the government (for the right wingers out there, please don't write about government being too big already, there are legitimate reasons for government to exist, and the printing/use of money is one of them) be setting this up, so that there is NO VALUE PROPOSITION, other than it makes it easier (and cheaper) for the merchants and their customers? While the banks try to get us to pay to obtain cash, technically, getting your own money out of the bank is supposed to be free!

There's a lot of splintered interests here that seem to hold back the success of mobile payments. Carriers have to agree to allow your mobile payment. They're not going to do that for free. Merchants need something to install new equipment and train employees to handle transactions and audit them. Consumers need some advantage over the highly entrenched and incredibly convenient methods of paying with credit cards, debit cards, or cash. If mobile payments are linked to a bank account, well now you're cutting into their debit card and credit card turf. Why would they allow that? It seems like there are a lot of players to keep happy here and no clear advantage for consumers.

I myself have only thought of using such technology to buy gas. Cumberland Farms in Massachusetts offers a $0.10/gallon discount if you pay with your phone. I've thought about it, but I would have to go out of my routine routes to use it, so why would I do it? Now if one mobile payment company wanted to give me that discount everywhere?

Security is another issue. Mobile phones are far more vulnerable to theft because they are in users' hands or in easily accessible places much more of the time than credit cards. In major cities, thieves grab phones right out of users' hands at bus stops, on subway trains and in sidewalk crowds. While users can shorten the time before the phone goes back to locked mode, and can add passwords to access payment services, those will cut into the utility and convenience of mobile phone payments. Meanwhile, for smaller card purchases at many merchants, a signature is not even required; a swipe or tap is all it takes.

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