Bank, Service Provider Fees Slow Mobile Payments

J.C. Penney and Nordstrom announced this week that they’re looking to eliminate cash registers and traditional cashiers in their stores, with an eye toward using devices like the iPod Touch to enable wireless payments.

That sounds good, but many consumers don't feel compelled to give up paper checks just yet. In fact, there are some 27.5 billion paper checks written each year -- the majority of which are consumer-to-business transactions.

And, for the first time since the Federal Reserve started tracking payments in 2000, credit card payments declined -- the first time that any electronic payment type has declined. Meanwhile, debit card and pre-paid card use has increased; but debit and pre-paid cards have not displaced paper checks.

Why not? The reasons are many and varied. Some of it ties directly to rather foolish decisions that financial institutions have made to arbitrarily charge fees for using debit cards. Then there are companies like Verizon Communications Inc. (NYSE: VZ), which decided to charge customers for paying electronically (but not via paper check), in a thinly veiled attempt to force its customers to sign up for automatic bill payment.

According to John Elliott, executive director of mobility services and product and offering development lead at Accenture , another driver is that many new players like Google and Groupon -- strangers to the financial services landscape -- are changing the rules about payments.

"They’re using the payment service only as a commodity part of the broader mobile shopping user experience," he says. "Yet, while consumer acceptance of mobile wallets and person-to-person electronic payments is gaining momentum, banks have remained tentative about the technology out of concern that mobile payment systems will dictate how merchants and banks operate together in the future."

Another concern, Elliott says, is wariness about potential security risks.

"To tackle this issue head on," he says, "banks need to rethink their business models and invest in upgrading their back-end IT architecture."

Mobile payments: Not as cheap as checks
According to Andy Schmidt, research director with Commercial Banking and Payments of CEB TowerGroup, banks could make such investments if they focused on card and electronic payment technology vs. checks.

"Checks -- on average -- cost between $1.20 and $1.40 to process," he says. "For some banks, it’s much higher, with $3 per item being the highest I’ve seen recently. Card payments and electronic payments are far cheaper to process."

Setting up mobile payments capability varies by the size of bank and the type of functionality that banks want to offer, Schmidt says.

"Entry-level functionality, with basic P2P, balance inquiries, bill pay and remote deposit capture, costs approximately 42 cents per user for large banks and 87 cents for small banks," he says. "Offering more advanced capabilities, such as actionable alerts, inter-bank balance transfers, mobile photo bill pay and mobile product origination, costs less than 70 cents per user for large banks and about $1.70 per user for small banks."

For its part, Accenture hopes banks will do the math and recognize they should invest in mobile commerce and the education that will be necessary to motivate consumers to use it. Accenture's Mobile Wallet/Payments solution enables consumers to manage and operate all cards, including payment (debit, credit, closed loop, private label, gift card), transportation and loyalty. Moreover, the wallet integrates a managed stored value account and access to federated merchants, so it enables banks to manage the complete cycle of the final customer's shopping experience, thereby creating new revenue streams for the banks.

But Elliott admits that widespread adoption largely will be dependent upon investment by financial institutions.

“In the U.S., the key factor that will drive scalable user adoption hinges on banks and retailers building out the infrastructure to accept mobile payment transactions,” he says. “In the coming years, developments in such systems will offer not only convenience, but also added security and other benefits that will inevitably lead to widespread adoption.”

The Nordstrom effect
Nordstrom is looking to consumers to determine the best course of action where payments are concerned, says Colin Johnson, spokesman.

“We’re not looking to steer tender, but to evolve and adapt to what’s important to our customer, whether that means allowing them to use their own smartphone or using one of our smart devices,” he says.

As for whether Nordstrom will take paper checks in the future, Johnson says, “The main thing is that we will always work with customers depending on how they choose to tender payment. This is about evolving based on how customers are choosing to shop, and it's clear the customer values speed, convenience and a mobile-friendly shopping experience -- which includes the ability to quickly pay for product.”

Obvious opportunity exists here for mobile carriers to jump onboard and make mobile payments the smartest, easiest, least expensive option for banks and consumers. Instead of bickering with its own customers over a $2-per-month fee, Verizon -- and all other mobile carriers -- should be looking at investing money with major financial institutions and the likes of Nordstrom and other retailers to completely restructure the way consumers pay for everything.

— Denise Culver, Special to Light Reading

free_to_be_me 12/5/2012 | 5:25:47 PM
re: Bank, Service Provider Fees Slow Mobile Payments

Seems to me our culture is all about speed and convenience which will drive the use of checks into the proverbial coffin.

free_to_be_me 12/5/2012 | 5:25:44 PM
re: Bank, Service Provider Fees Slow Mobile Payments

Why? Um, go to a store. Any store. Find a seat where you can watch the cash register. Check the age of who writes checks. My 80 year old mother writes checks. My 20 year old son has never written a check in his life and likely never will.

shygye75 12/5/2012 | 5:25:44 PM
re: Bank, Service Provider Fees Slow Mobile Payments

The costs of using non-cash payments have been borne for the most part by the seller (except for the 20% interest part, of course). Businesses (and I'm thinking retailer types here) have mostly accepted the 2% to 4% vig charged by the credit card companies as a necessary cost of doing business. But as margins get squeezed and business slows, those transaction costs are starting to come under scrutiny. For small businesses, cash is still the best option. And some businesses are starting to reward customers who pay in actual hard currency.

patentchoi 12/5/2012 | 5:25:40 PM
re: Bank, Service Provider Fees Slow Mobile Payments

The comparison between mobile-payments and checks is misguided. The credit-card business has become viable inspite of checks not being completely eliminated.

Also the initial folks who would like to adopt mobile payments in the developed world would be ones who already use credit/debit cards, whereas in the developing world many  would likely not have even a bank account. The requirements of these two markets are quite different.

The former may adopt a smartphone based solution whereas the latter would need a different solution.

The role of the mobile service provider in the whole payment equation has a lot to do with market specifics.

Mobile-payments also should not be confused with mobile-banking.

shygye75 12/5/2012 | 5:25:37 PM
re: Bank, Service Provider Fees Slow Mobile Payments

To your point, developing economies are adopting mobile commerce in a different way, with the main focus being on some form of banking substitute. This is a greenfield area in these economies, as opposed to mobile payments in developed markets, which functions more like a fourth option (cash, credit/debit card, checks) for payment. In developing economies, mobile commerce is happening on 2G and 3G networks. No smartphones, but smart development.

Sign In