Forget Interchange Relief—Even Those Developing Mobile Payments Say Banks Will Still Be In Charge

Nick Holland has spent the last decade covering the intersection of the mobile and payments industries. He currently covers all things mobile-transaction related at Yankee Group.

From all the buzz about mobile payments, you'd think they represent a major shift in how consumers will pay for goods and who will get a piece of that payment. But increasingly, it looks like that's not the case. And it also appears that the people most involved in mobile payments—the companies developing mobile-payment systems—understand that not much is going to change with interchange.

With all the signal and noise pertaining to mobile payments (98 percent noise, 2 percent signal), it is extremely hard to define what exactly is going on. Who will own what? What is there to own? What is a Secure Element anyway? Most of all, what will it all mean for the interchange fees that merchants pay to card companies?

A recent survey by Yankee Group offers a clue. Twenty key representatives from companies involved in developing mobile payments in the U.S. were interviewed. One question asked was: What level of importance do the following stakeholders have in ensuring security for mobile payments—banks, mobile operators, retailers and consumers?

According to those surveyed, retailers have a 28 percent level of importance now, which will rise to 50 percent in two years. Mobile operators are at 44 percent today and will be at 61 percent two years from now. Consumers are at 56 percent now, climbing to 61 percent in two years. And banks are currently at 78 percent, rising to 89 percent in two years' time.

Predictably, all responses indicated that an increase in importance relating to security was expected to occur over the next two years. But more interesting was that the interviewees perceived banks as the most important in ensuring mobile payment security—in fact, the overwhelming majority considered banks to be important or extremely important today, and they'll become even more important as time goes on.

Bear in mind that these interviewees are considered to be domain matter experts—people intimately involved in developing mobile-payment services in North America. What this telegraphs quite clearly is that these people still believe traditional banks will have the greatest responsibility for mobile payments and, by association, are not expected to be disintermediated by new payment mechanisms.

If the people who are creating the new mobile-payment systems don't think banks will fall out of the chain, there's no chance that will happen.In fact, those people believe banks will just keep getting more central to payments—and so will their interchange fees.

Mobile payments will introduce new entities to the mix, namely mobile operators. But they will not radically change anything. From a payments perspective, it's business as usual, with just a new form factor of credit or debit card in the shape of a phone. The underlying rails that make the payments happen today will continue to be used in the future.

So what does this mean? When it comes to mobile payments, everyone should take a step back. Beyond the hype, the actual payment part is pretty dull and traditional.

Remember the Exxon Mobil Speedpass keyfob? Exactly. It hardly set the world alight having the means to pay at the pump with a small plastic dongle rather than a credit card. Similarly, it will hardly set the world alight paying with your phone at the point of sale.

Mobile payments are boring. There, I said it.

But the physical act of paying isn't really the exciting part anyway. The capabilities of current-generation smartphones, in terms of computing power, location awareness, broadband connectivity and subscriber penetration, facilitate entirely new models of interactivity between merchants and consumers. Instead of current-generation checkouts that spew a stream of coupons at you as you have just finished bagging, you can now have highly targeted coupons sent to you in real time to augment the retail experience, indexed to store inventory so that perishable items receive faster turnover.

Or consider dynamic pricing that can change at various times of day to encourage greater consumer throughput. Or that the point of purchase can now be a clerk wandering around with a mobile phone, rather than being stuck behind a dusty checkout.

It's time to shift our focus from the payments part to the far greater value proposition of what mobile can do to completely restructure the retail environment. If you are thrilled by the prospect of visiting an ATM, then mobile payments are probably for you. Personally, I'd much rather my phone let me know that there's 80 percent off my favorite all-you-can-eat sushi buffet for the next hour.

Please reach out to me and share your thoughts.